**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, 2005** |
| **or**                                           |
| o                                                | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                to               **

**Commissionfile 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’stelephone number, including area code: (408) 433-0910**

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

**Securitiesregistered pursuant to Section 12(g) of the Act:Common Stock, $0.0001 Par Value**

**Series AParticipating Preferred Stock Purchase Rights**(Titleof Class)

**Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes ****x****   No ****o**

**Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§29.405 of this chapter) isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ****o**

**Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Act).   Yes ****x****   No ****o**

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

The aggregate market value of the voting and non-votingcommon stock held by non-affiliates of the Registrant, computed by reference tothe closing price at which the Common Stock was sold on December 31, 2004,as reported on the Nasdaq National Market was approximately $443,840,284. Thiscalculation does not reflect a determination that such persons are affiliatesof the Registrant for any other purpose.

As of August 31, 2005, there were approximately46,453,761 shares of Registrant’s Common Stock outstanding.

Portions of the ProxyStatement for the Registrant’s 2005 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, 2005INDEX**
|                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |
| **Item 1.**  |       | Business                                                                                                           |       | 3        |
| **Item 2.**  |       | Properties                                                                                                         |       | 14       |
| **Item 3.**  |       | Legal Proceedings                                                                                                  |       | 14       |
| **Item 4.**  |       | Submission of  Matters to a Vote of Security Holders                                                               |       | 15       |
| **PART II**  |
| **Item 5.**  |       | Market for  Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 16       |
| **Item 6.**  |       | Selected Financial  Data                                                                                           |       | 17       |
| **Item 7.**  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                    |       | 18       |
| **Item 7A.** |       | Quantitative  and Qualitative Disclosures about Market Risk                                                        |       | 48       |
| **Item 8.**  |       | Consolidated  Financial Statements and Supplementary Data                                                          |       | 50       |
| **Item 9.**  |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                              |       | 87       |
| **Item 9A.** |       | Controls and  Procedures                                                                                           |       | 87       |
| **Item 9B.** |       | Other Information                                                                                                  |       | 89       |
| **PART III** |
| **Item 10.** |       | Directors and  Executive Officers of the Registrant                                                                |       | 89       |
| **Item 11.** |       | Executive  Compensation                                                                                            |       | 89       |
| **Item 12.** |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   |       | 89       |
| **Item 13.** |       | Certain  Relationships and Related Transactions                                                                    |       | 89       |
| **Item 14.** |       | Principal  Accounting Fees and Services                                                                            |       | 89       |
| **PART IV**  |
| **Item 15.** |       | Exhibits and  Financial Statement Schedules                                                                        |       | 90       |
|              |       | Signatures                                                                                                         |       | 96       |

 

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**PART I**

**FORWARD-LOOKING INFORMATION**

*When used in this discussion, the words “expects,” “anticipates,”“estimates,” “believes,” “plans,” “will,” “intend,” “can” and similarexpressions are intended to identify forward-looking statements. Thesestatements are subject to risks and uncertainties that could cause actualresults to differ materially from those projected.*

*These risks and uncertainties include, but are notlimited to risks relating to general economic conditions in the markets weaddress and the telecommunications market in general, risks related to thedevelopment of our new products and services, the effects of competition andcompetitive pricing pressure, uncertainties associated with changingintellectual property laws, developments in and expenses related to litigation,increased competition in our markets, inability to obtain sufficient amounts ofkey components, the rescheduling or cancellations of key customer orders, theloss of a key customer, the effects of new and emerging technologies, the riskthat excess inventory may result in write-offs, price erosion and decreaseddemand, fluctuations in the rate of exchange of foreign currency, changes inour effective tax rate, market acceptance of our new products and services,technological advancements, undetected errors or defects in our products, therisks associated with our international sales, geopolitical risks and risk ofterrorist activities, the risks associated with attempting to integrate othercompanies we acquire, and the risks set forth below under Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Factors That May Affect Results.”*

*These forward-looking statements speak only as ofthe date hereof. We expressly disclaim any obligation or undertaking to releasepublicly any updates or revisions to any forward-looking statements containedherein to reflect any change in our expectations with regard thereto or anychange in events, conditions or circumstances or on which any such statement isbased.*

*In the sections of this report entitled “Business”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Factors That May Affect Results,” all references to “Symmetricom,”“we,” “us,” and “our” mean Symmetricom, Inc. and its subsidiaries, exceptwhere it is made clear that the term means only the parent company.*

*TimeSource,SMARTCLOCK, BesTime, GoLong, GoWide, TimeHub, TimePictra, TimeCesium,TimeProvider and TimeScan are our trademarks. We also refer to trademarks ofother corporations and organizations in this document.*

**Item 1.**                        *Business*

See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RiskFactors That May Impact Future Operating Results” for risk factors thatmay adversely affect Symmetricom.

**Overview**

Symmetricom is a leadingsupplier of synchronization and timing products of communications serviceproviders, network equipment manufactures, U.S. Department of Defense (DOD),aerospace contractors, enterprises, governments and research facilities. Wesupply solutions for customers who demand reliable “carrier class” products andengineering expertise in a variety of applications, including networksynchronization, timing, frequency generation and distribution, testing,management, verification and/or the measurement of a time and frequency-basedsignal. We design and manufacture timing solutions for the U.S. aerospaceindustry, precision references for global communications, telecomsynchronization management systems, secure GPS time for the U.S. government,rubidium clocks, cesium clocks, and network timeservers. Our products includesynchronization network elements, and timing elements wireline, cable andwireless networks as well as the provision of professional services. Our productsplay an essential role in network reliability, and quality of service forwireline, cable and wireless communication 

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networks,enabling our customers to increase performance, minimize service interruptions,and provide seamless voice, video and data services efficiently in theirnetwork infrastructure.

***Integration of TrueTime, Inc. and Datum Inc.***

In October 2002, wecompleted the acquisitions of TrueTime, Inc. (“TrueTime”) and Datum Inc. (“Datum”).The acquisition of TrueTime added global positioning system (GPS)-basedtechnology and products and gave us an opportunity to expand our customer base,add new distribution channels and strengthen our competitive position in boththe government and commercial markets. The acquisition of Datum added technicalexpertise in atomic clock technologies, provided additional verticalmanufacturing capabilities, and expanded our suite of products while alsoproviding a larger, more diverse customer base. We spent considerable time andresources during fiscal 2003 and the first half of fiscal 2004 to integrate theoperations of TrueTime and Datum, and began to realize synergies from theseacquisitions in the second half of fiscal 2004. The financial results of thesesynergies are explained in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

***Reportable Segments***

Subsequent to ouracquisitions of TrueTime and Datum, we reorganized our structure and now have atotal of five reportable segments. There are four reportable segments withinthe Telecom Solutions Division: Wireline Products, Wireless/OEM (originalequipment manufacturer) Products, Global Services and SpecialtyManufacturing/Other. The fifth reportable segment is our Timing, Test andMeasurement Division. Information as to net revenue and gross profit marginattributable to each of our reportable segments for each year in the three-yearperiod ended June 30, 2005, is contained in Note N of our notes to theconsolidated financial statements.

***Telecom Solutions Division***

Our network solutions synchronize the flow ofinformation (such as voice, video and data) in telecommunications networks. Asan innovator in the development of synchronization equipment and solutions, wecontinue to pioneer the development of time and frequency protocols anddistribution, as well as innovation of cesium tubes, rubidium oscillators andhydrogen masers. We hold significant patent portfolios in advanced controlalgorithms and implementations using the Global Positioning System (GPS),DOCSISTM Timing Interface (DTI) and Code Division Multiple Access(CDMA). Our technology improves the performance, reliability and operability ofthe telecommunication infrastructure. In fiscal 2005, we actively participatedin the modernization of several synchronization networks with certain serviceproviders, and helped others to develop future plans for such efforts. Thecarriers and operators are being driven by network economics and competitiveforces to evolve their network infrastructure toward integrated transmissionand switching functions and packet-based technologies. We believe thisevolutionary trend, in turn, demands a more intelligent and reliablesynchronization infrastructure. Symmetricom played a leading role in thespecification process at CableLabsTM where the next generation ofcable services and infrastructure are defined. In this effort Symmetricomcontributed technology and expertise to specify the first standardized time andfrequency synchronization standard in a next generation packet network. Wecontinue to build a strong portfolio of precise time and frequency solutionsand address the growing synchronization requirements of all layers of theexisting circuit switched network and next generation packet networks.

The Global Services segmentprovides services for all our product lines and continued growing its businessduring this fiscal year by expanding its product offerings for the TelecomSolutions Division with innovative new services such as Sync Office Audits andSpares Support. Symmetricom continues to add new customers globally and workclosely with existing customers to deliver service products customized to meettheir needs.

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

Our Timing, Test and Measurement Division providesprecision time and frequency instruments and reference standards for a widevariety of applications to the aerospace, defense, enterprise, test andmeasurement marketplaces. Products include synchronized clocks, networktimeservers, network displays, time code generators, computer plug-in cards andprimary reference standards such as Cesium Frequency Standards and ActiveHydrogen Masers. Customer applications include frequency and timesynchronization, synchronizing computer networks and calibration of labequipment. To support both a diverse customer and product base, the divisionhas built strong application engineering capabilities that allow us to tailorour standard product platforms to our customers’ unique system requirements.

During the past fiscalyear, the division continued its strong emphasis on government program businessand successfully won approximately seven major opportunities in governmentsecure fixed communications, secure mobile communications and air trafficcontrol. Key customers included Lockheed Martin, Raytheon, Northrop Grumman,Boeing, DISA and various military procurement and service agencies. We alsosignificantly grew our international business with an emphasis on enterprisenetwork timeservers. New products introduced during the year included a newline of universal-signaling time and frequency boards, the 8040C rubidiumfrequency reference, several new options for our flagship XLi platform,including the XLi SAASM, which opened the door to Symmetricom addressing thenext generation of secure GPS requirements, the XL-GPS mid-range receiver, andthe XL-750 which is a targeted product for the Power Utilities industry.

***General Information***

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

We maintain a websitelocated at *www.symmetricom.com*.We make available, free of charge on or through our website, our annual report onForm 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Exchange Actas soon as practical after we electronically file such material, or furnish it,to the SEC. Information contained or referenced on our website is notincorporated by reference into and does not form a part of this Form 10-K.

**Industry Background**

The markets served by Symmetricom include: wirelineand cable infrastructure, OEM telecommunications synchronization, broadbandaccess and timing, test and measurement instrumentation for aerospace, defense,enterprise and power utilities.

The past several fiscal years have posed a tremendouschallenge to the telecommunications industry. Carriers and service providershave struggled with rapid changes in their customer base, high customerturnover, competition, evolving business models, continuing changes in theregulatory environment and changing service demands. Carriers and service providerscontinue to scrutinize their capital expenditures closely and continue to focuson leveraging their investments. In this environment, efficient use of theexisting infrastructure becomes critical to the service provider’s success.

The time and frequencyindustry may be divided into the following markets: wireline infrastructure(systems), cable infrastructure (systems), Wireless/OEM products, specialtymanufacturing/other and timing, test and measurement.

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***Wireline Infrastructure (Systems) Market***

The wirelineinfrastructure market includes local, long distance and internationaltelecommunications service providers and carriers. Customers in this marketinclude worldwide public network providers, incumbent local exchange carriers(ILECs), public telephone and telegraph companies (PTTs), competitive localexchange carriers (CLECs), and other telephone companies. Demand from most ofthis sector has declined over the past several fiscal years as network serviceproviders continue to decrease their capital spending. In the United States,there is continued uncertainty regarding telecommunication de-regulationpolicies, and we believe this uncertain environment has contributed to thereduced spending by service providers. We believe that the need to make networksefficient, the need for greater reliability and the demand for better qualityof service in the infrastructure may enhance the need for synchronization overthe long-term. Further, new packet technologies may require new or enhancedsynchronization technologies and protocols in networks. As these newtechnologies are deployed, we expect to see increasing demand forsynchronization. However, the adoption of such new technologies may occurslowly.

***Wireless/OEM Products Market***

Symmetricom’s Wireless/OEM products market consists ofwireless and broadband access. Wireless telecommunications networks consist ofnumerous cells located throughout a service area. In a wireless network, callsare segmented, transmitted over the air, and reassembled by a receiver withinthe network. In certain wireless technologies, lack of proper synchronizationmay result in signal degradation and dropped calls and loss of data, therebydecreasing network efficiency and capacity. Furthermore, certain engineeringrequirements demand a high level of synchronization to support a greater numberof callers simultaneously. Currently the next generation wireless base stationssupporting 3G is the target market for our OEM technology and products.Historically our wireless business has generated lower margins than ourwireline business. As previously discussed, the cable market has an emergingsynchronization requirement. This requirement not only defines systems, butalso embedded clients to receive synchronization signals. While these interfaceshave been standardized in the cable market, Symmetricom markets its embeddedimplementations to receive and process these signals in a cable vendor’sequipment.

Broadband access isanother part of our Wireless/OEM products segment. The demand for bandwidthfrom businesses continues to grow steadily, and broadband service providershave focused on meeting the increased demand by more efficiently utilizingtheir existing infrastructure. Symmetricom’s GoWide family of broadband accessproducts allows carriers to offer enhanced high-speed data services to theirbusiness customers through their existing DSL infrastructure. Currently, ourG.shdsl products serve a niche market primarily deployed in Europe.

***Specialty Manufacturing Market***

Our production facility inPuerto Rico is outfitted to provide specialty (contract) manufacturing toselect clients. Customers in this market are mainly from the semiconductor andmedical industries. The purchase volume of our customers was consistentthroughout fiscal 2005. The gross margin of these contract-manufacturingarrangements is typically lower than the margin in our other business.

***Timing, Test and Measurement Market***

Time and frequencyinstruments are important for expanding government communications systems ofwireline, wireless, satellite and computer network technologies, as well as forsynchronizing critical infrastructures such as U.S. power generation and thedistribution grid. The increase in demand for precision timing is due in partto the growth in public sector communications and computer network systemsworldwide. Growth in data, voice and video transmissions on these networks isanticipated to lead to an increased demand for substantial bandwidth comparedto traditional voice traffic. We believe that 

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these trendswill lead to increased demand for precision time and frequency products, whichsynchronize these networks. In addition, we believe the network centricactivities within private and public businesses that are installing, growing ormaintaining Internet Protocol networks of computer servers and clients may alsodrive growth in thedemand for time and frequencyproducts. Information control in the network, as well as applications supportrequiring synchronized time-of-day on a secure IP infrastructure, are drivingthe implementation of accurate network time appliances on the network. Webelieve these trends will continue and will drive future growth in the demandfor network based time and frequency products and services.

**Products**

We provide infrastructuresolutions for the global communications market. We are a leading provider ofprecise synchronization, timing and frequency solutions. The followingdiscussion includes products from each of our five reportable segments:Wireline products, Wireless/OEM products, Global Services, SpecialtyManufacturing/Other and Timing, Test and Measurement products.

***Wireline Products***

The telecommunications network consists of a series ofinterconnected switching equipment and other components that route information(i.e., voice, video, data, etc.) throughout the network. For these networks tofunction efficiently, it is essential that each network be synchronized andindividual nodes within the network operate within precise tolerances.Precision synchronization equipment throughout these networks provides afrequency and/or time reference to enable digital switching, routing andtransmission systems to operate at a common, synchronized clock rate, therebyaligning timeslots which increase bandwidth utilization while minimizing signaldegradation and reducing errors throughout a 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)*—consists ofthe GPS-based Time Source family, and the cesium-based Time Cesium.

·       *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 ofTimeProvider, 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 ofTimePictra, the carrier class HP-UX based system, and TimeScan, the PC-basedsystem.

***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 Wideband CDMA and the governing standards that apply. For example,in CDMA, most manufacturers require GPS 

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for every base stationwith either a high performance quartz or rubidium oscillator. In addition,enhanced 911 (E911) services, which include wireless location technologyhelping emergency services personnel locate and provide assistance to wireless911 callers much more quickly, and similar location based services requiretechnology that utilizes accurate timing (typically derived from GPS) for thelocation measurement unit (LMU) products.

These solutions are also available to othercommunication applications requiring high precision frequency and timinginformation, 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 acombination of GPS, quartz oscillators, rubidium atomic oscillators,input/output signals and control algorithms. Some of the control algorithms arecontained in our BesTime technology.

·       Anotherproduct family within Wireless/OEM Products is our broadband access productsfamily. Incumbent carriers are moving transport of traditional data servicesaway from legacy equipment to new infrastructure equipment in order to lowertheir operational costs. Alternate carriers are moving to deliver costeffective competitive services over their ATM-based Digital Subscriber LineAccess Multiplexers (DSLAMs).

·       OurGoWide 2.3, 4.6, 9.2 and 18.4 Symmetrical High-speed Digital Subscriber Line(SHDSL) modems portfolio offers higher data rates, greater reach and enhancedspectral compatibility when compared to legacy transport technologies. Theseproducts deliver high speeds by bundling multiple DSL links, and focus oncircuit emulation applications. In addition, our GoWide network terminationunits provide private line and frame relay services over SHDSL utilizing thecarrier’s ATM network.

·       Carrierschoosing SHDSL to deploy services delivering higher symmetrical-speeds,enhanced routing and security capabilities are all potential users of GoWide.These products deliver high value features demanded by small to medium sizedbusinesses requiring increased data bandwidth. Currently, deployment of our broadbandproducts has been primarily in Europe and acceptance of G.shdsl has been slowin the U.S.

***Global Services***

Our Global Servicesorganization provides lifecycle services for all Symmetricom product lines.Services products fall into five main categories:

·       *Engineering and installation*—Ourengineering and installation services help customers implement new Symmetricomproduct purchases.

·       *Operations and support programs*—Ouroperations and support programs such as Sync Office Audits assist customers inmaintenance of their sync networks, help ensure power and alarm diversity toavoid service outages and identify system capacity.

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·       *Maintenance*—Our maintenance offerings aredesigned to help customers minimize staff and expenses necessary for ongoingsupport of their Symmetricom products. These include 24 x 7 technical support,traditional return-to-factory repair services and on-site repair labor.Innovative new offerings such as our Spares Support contract are proving to bean attractive alternative to traditional spares and repair programs.

·       *Training, certification programs and professionaldevelopment courses*—Our training courses enable customer personnelto successfully utilize and maintain our products. These programs are alsoavailable under license for customers who maintain their own training centers.

·       *Consulting and other professional services*—Our consultingservices assist customers in planning new sync networks and developing growthor disaster recovery plans for existing sync networks.

***Specialty Manufacturing/Other Products***

Our services and productscan vary according to client specifications. We normally manufacture semiconductorequipment. Also included in this segment are any products that are notspecifically allocable to another division.

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

We offer a widevariety of precision time and frequency products sold primarily to the aerospace/defense,government and public sector. These products can generally be divided into thefollowing broad categories:

·       *Precise Time and Frequency Products*—We manufacture precision time products that allow our customersto keep accurate time within 40 billionths of a second in a 24-hourperiod. In many ways, our precise time products are similar to clocks andstopwatches—our clocks tell us the time of day and allow us to measure the timeinterval between when an event starts and when it stops. The difference betweenconventional time measuring devices and our precise time products lies in theaccuracy of the measurements. To place the accuracy of our clocks inperspective, a clock, which accumulates a 40 billionth of a second time errorover a 24-hour period, will require more than 500,000 years to accumulatean error of one second.

Quartz-basedclocks are subject to numerous physical factors that affect the overall clockaccuracy and stability, including temperature changes and aging. We rely uponGPS as a timing reference for continuously disciplining our oscillators, thefundamental component that determines the accuracy of our time and frequencyproducts. .

·       *ComputerPlug-In Cards**—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. Aside fromproviding accurate time measurement, these cards can provide a variety of timeand frequency and other time outputs and functions, as well as time transferfor synchronization. Currently, plug-in cards connected by cables provide aneasy and accurate way to synchronize the clocks of two or more computers. Wealso offer software development tools to speed the integration of these cardsinto software applications, which may save software developers significant timeand money.

·       *Computer Network Time Servers*—We manufacture several products forcomputer network time distribution. These products provide an extremelypowerful and efficient manner in which to bring entire networks of computersinto precise time synchronization. Designated computers run programs in thebackground that periodically adjust the time of each local computer to that ofthe network time server. As a result, we believe that network synchronizationof thousands of computers to an accuracy of a second or less is achievableusing these products. With the pervasive 

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growth of the Internet ande-commerce and increasing electronic transactions, we believe that the demandfor such synchronization products will increase.

·       *Time Code Products*—Weoffer a wide variety of time code generation, translation and synchronizationproducts, including timing output options for our precise clocks. A time codeis a data format for recording and processing time measurements. Time codesarose from the need to synchronize the instruments used to monitor the manyaspects of a real time weapons test and to share the collected data with othersmonitoring the same test at different locations. Time codes provide the digitaldata format necessary for computers to transfer and correlate encoded time dataamong computers in a highly accurate manner.

·       *Time Displays*—These one-half-inch to four-inch light-emitting diode, or LEDdisplays, often present a variety of information including the time of day,frequency information regarding system electrical current, or “countdown-to-launch”arrays. In many cases, the display is sold as an accessory to a precision clockto display the precise time in an instrument rack or control room.

·       *Precision Frequency References*—Precision Frequency References formthe basis of absolute time and frequency in many systems and applications. Ourproducts include active hydrogen masers, cesium frequency standards, rubidiumfrequency standards and quartz frequency standards. Our primary referencesource instruments provide stand-alone dependability, ease of use, and ease ofinstallation that make them suitable for the critical time or frequency systemsfound in telecommunications timing, calibration and metrology laboratories,satellite tracking stations and space-based master time standards.

·       *Space, Defense and Avionics*—We offer products and programs that use cesium, rubidium andquartz technologies for a wide range of uses, whether it is a defense relatedmobile terrestrial or airborne platform, or a satellite platform in space. Weprovide ruggedized and militarized quartz and atomic clock platforms for themost demanding military satellite applications. For applications such as FA-22Raptor and F-35 Joint Strike Fighter planes, 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. Small size, low power demand, fastwarm-up capability, superior stability and superior spectral purity make thesedevices suitable for critical and tactical aerospace applications like radionavigation, satellite transmission and tracking and guidance systems.

**Sales, Sales Services and Marketing**

We sell our products directly to customers and throughdomestic and international distributors and systems integrators. In the UnitedStates, our wireline, cable, wireless and broadband access products areprimarily sold through our own sales force to ILECs, PTTs, CLECs, othertelephone companies, wireless service providers, cable television operators,Internet Service Providers (ISPs) and OEMs. Our instrumentation productsare primarily sold through manufacturer sales representatives, and ourenterprise products are sold through an internal telesales channel.

Internationally, we marketand sell our products through our sales force, independent salesrepresentatives, distributors and system integrators. As of June 30, 2005,we employed a sales, sales service, and marketing force of 125 people,including 95 employees in domestic sales, 9 employees ininternational sales and 21 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. 

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As of June 30, 2005, wehad 45 United States patents, of which 39 are active and more than 20pending patent applications covering certain technology used by our operations.The 39 United States patents issued expire between July 2005 and August 2022.In addition, we use technology licensed from others. We believe that ourpatents have value, but we rely primarily on innovation, technologicalexpertise and marketing competence to maintain our competitive advantage. Thetelecommunications industry is characterized by the existence of a large numberof patents and frequent litigation based on allegations of patent infringement.We intend to continue our efforts to obtain patents whenever possible, butthere can be no assurance that patents will be issued or that any existingpatents or patents that are obtained will not be challenged, invalidated orcircumvented, or that the rights granted will provide any commercial benefit tous. Additionally, if any of our processes or designs are identified asinfringing upon patents held by others, there can be no assurances that alicense will be available or that the terms of obtaining any such license willbe acceptable to us. In addition, the laws of certain countries in which ourproducts may be developed, manufactured or sold may not protect our productsand intellectual property rights to the same extent as the laws of the UnitedStates.

We generally enter into confidentiality agreementswith our employees and consultants and with third parties in connection withour technology license agreements. These confidentiality agreements generallyseek to control access to, and distribution of, our technology, documentationand other proprietary information. Despite these precautions, it may bepossible for a third party to obtain and use our proprietary informationwithout authorization or to develop similar 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 tool to protectour 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 and Hofolding, Germany. In addition, customand semi-custom instrumentation products are developed, assembled and tested inSanta Rosa, California. All of our manufacturing facilities are certified andregistered to the ISO 9001:2000 quality system standard. During fiscal2005 our Beverly, Massachusetts facility was upgraded to meet the higher TL9000 quality system standard (a standard for manufacturing and engineering).Our San Jose, California facility was also upgraded to meet the TL 9000quality system standard for its engineering process (it is not a manufacturingsite). We currently do not plan to upgrade our Santa Rosa, California;Tuscaloosa, Alabama and Hofolding, Germany facilities.

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**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. Our total backlog amounted to$31.0 million as of June 30, 2005, compared to $41.8 million as of June 30,2004. Our backlog, which is shippable within the next six months, was $20.5million as of June 30, 2005, compared to $27.9 million as of June 30,2004. Most orders included in backlog can be rescheduled or cancelled bycustomers without significant penalty. Historically, a substantial portion ofnet revenue in any fiscal period has been derived from orders received duringthat fiscal period. Our backlog may also be affected by the cancellation ordelay of customer orders, the overall condition of the telecommunicationsindustry, overall worldwide economic conditions and the cyclical nature ofcustomer demand in each of our markets. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Factors that May AffectResults.”

**Key Customers and Export Sales**

No single customer accounted for more than 10% of ournet revenue during fiscal 2005, 2004 and 2003. Our export sales, which wereprimarily to Western Europe, Latin America, Asia and Canada, accounted for 35%,32% and 33% of our net revenue in fiscal years 2005, 2004 and 2003,respectively. For additional information regarding our export sales, see note Nto our consolidated financial statements. We have products operating in92 countries.

Gains and losses on theconversion to United States dollars of accounts receivable and accounts payablearising from international operations may in the future contribute tofluctuations in our business and operating results. Sales and purchaseobligations denominated in foreign currencies have not been significant. We donot currently engage in currency hedging activities or derivative arrangementsbut may do so in the future to the extent that foreign currency transactionsbecome more significant.

**Competition**

Competition in thetelecommunications industry is intense. Many of our competitors or potentialcompetitors are well established and have significant financial, manufacturing,technical and marketing resources. Competitors of our synchronization productsinclude Frequency Electronics, Inc., Huawei Technologies Co. Ltd., EmriseCorp., and Oscilloquartz SA. Competitors of our Wireless/OEM Products includeFrequency Electronics, Inc. and Trimble Navigation, Ltd. In the enterprisenetwork timing market, we compete primarily with Meinberg and EndRunTechnologies. In the rubidium oscillators market, we compete primarily withFrequency Electronics, Inc. and Temex. In addition, certain companies,such as Perkin Elmer, Inc., that currently manufacture productsexclusively for use in military applications could enter commercial markets andcompete directly with us. Competitors of our timing, test and measurementproducts include Frequency Electronics, Inc., Trak Systems, Inc. (aVeritas Corporation subsidiary) and Brandywine Communications. In addition, theTelecommunications Act of 1996 permits ILECs to manufacture telecommunicationsequipment, which may result in increased competition.

**Research and Development**

As of June 30, 2005, we had 86 engineers andtechnicians directly involved in the research, design and development of ourproducts. We also utilize domestic and international contractors (primarilyIndia) to assist us in our research and development activities. We focused ourdevelopment efforts in fiscal 2005 on the development of both hardware andsoftware products. Our new product development program includes wireline andwireless synchronization, network management software, government communication,space defense, avionics, network time service, integrated access devices andupdates and maintenance on existing products. In fiscal years 2005, 2004 and2003, our overall research and 

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development expenditureswas $16.3 million, $16.8 million and $21.5 million, respectively. We expensedall research and development expenditures as they were incurred.

Our primary productdevelopment centers are in San Jose, California; Santa Rosa, California;Beverly, Massachusetts and Austin, Texas.

**Government Regulation**

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.

**Environmental Regulation**

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 used in our manufacturing process. Failure to comply withsuch regulations could result in a suspension or cessation of our operations,or could subject us to significant future liabilities. See “Item 3. LegalProceedings.”

**Sourcesand Availability 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, 2005, we had 830 employees, including554 in manufacturing, 86 in engineering and 190 in sales, marketing, serviceand general and administration. None of our employees are represented by alabor union, and we have experienced no work stoppages. We believe that ouremployee relations are good.

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**Item 2.        *Properties***

Thefollowing are our principal facilities as of June 30, 2005:
| **Location**           | ** ** | ** **                                     | ** ** | **Principal Operations** | ** ** | **Approximate  Floor Area  (Sq. Ft.)** | ** ** | **Owned/Lease   Expiration Date** |
|------------------------|------------|------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|-----------------------------------|
| Irvine, California     |       | Manufacturing (vacant)                         |       |                     | 46,000     |                                   |       | July 2005                    |
| Irvine, California     |       | Manufacturing (vacant)                         |       |                     | 67,000     |                                   |       | July 2005                    |
| San Jose, California   |       | Corporate Headquarters  (partial sublease)     |       |                     | 118,000    |                                   |       | April 2009                   |
| San Jose, California   |       | Administrative Office  (sublease)              |       |                     | 6,000      |                                   |       | September 2005               |
| Santa Rosa, California |       | Manufacturing/Administrative  (partial vacant) |       |                     | 70,000     |                                   |       | December 2015                |
| Santa Rosa, California |       | Manufacturing (partial  sublease)              |       |                     | 25,000     |                                   |       | December 2008                |
| Beverly, Massachusetts |       | Manufacturing                                  |       |                     | 54,000     |                                   |       | Owned                             |
| Austin, Texas          |       | Administrative Office                          |       |                     | 15,000     |                                   |       | December 2006                |
| 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 2006                |
| Beijing, China         |       | Administrative                                 |       |                     | 807        |                                   |       | February 2006                |
| Guangzhou, China       |       | Administrative                                 |       |                     | 600        |                                   |       | February 2006                |

 

We have sublet approximately34,000 square feet of our San Jose facility through March 2007 andapproximately 16,025 square feet of our Santa Rosa facility through November 2008.We believe that our current facilities are suitable and adequate to meet ouranticipated needs for the foreseeable future. In December 2003, wecompleted the integration and consolidation of our former manufacturingoperations in our Irvine facility into our Beverly, Massachusetts’s facility.

**Item 3.        *Legal Proceedings***

In late 1996, Datum (which we acquired in October 2002)received notice of potential environmental contamination from the owner of apremises in Austin, Texas that had previously been occupied by Austron, Inc.,a Datum subsidiary for its wireline operation (“Austron”), prior to Datum’sacquisition of Austron in 1988. Although Austron had remediated the sitepursuant to then-existing environmental regulations in connection with vacatingthe site in 1983, the applicable environmental regulations were modified after1983, providing the basis for the property owner’s claim that the soil at thesite contains the same contaminants that were the focus of Austron’s previousremediation efforts. In compliance with current law, Datum had established theextent of the site contamination, which extends to adjoining properties ownedby third parties. In May 2004, we received a demand from the owner ofseveral adjoining lots for damages, as well as seeking an indemnity for thecontamination and a promise to remediate the contamination. The adjacent propertyowner has not filed suit but, if a suit is filed, we will contest itvigorously. We believe that we will continue to incur monitoring costs for thenext several years in connection with the site contamination and may be subjectto demands and claims from other adjoining landowners in addition to the claimfor remediation discussed above, and the amount of such costs and the extent ofthe our exposure to such claims cannot be determined at this time. Althoughthere can be no assurance that the costs of remediation efforts, the propertyowners’ claims or any related governmental action will not singly or in theaggregate have a material adverse effect on our financial condition or resultsof operations, we do not believe our ultimate aggregate liability will havesuch an effect. We currently have an accrual of $0.8 million for remediationcosts, appraisal fees and other ongoing monitoring costs.

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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.

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

Not applicable.

**Executive Officers of Symmetricom**

Followingis a list of our executive officers as of June 30, 2005 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 |       | 55         |       | Chief Executive Officer                                         |
| William Slater   |       | 53         |       | Chief Financial Officer  and Secretary                          |
| John Yuzdepski   |       | 43         |       | Executive Vice President  and General Manager TS Division       |
| Bruce Bromage    |       | 51         |       | Executive Vice President  and General Manager TT&M Division |
| Nancy Shemwell   |       | 49         |       | Sr. VP 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 as Presidentand Chief Operating Officer, Telecom Solutions, a division of Symmetricom, fromMarch 1998 to December 1998. Prior to joining Symmetricom, from February 1996to February 1998, Mr. Steipp served as Vice President and GeneralManager of Broadband Data Networks, a division of Scientific-Atlanta.

*Mr. Slater*has served as Chief Financial Officer and Secretary of Symmetricom since August 2000.From September 1991 to December 1999, Mr. Slater served asExecutive Vice President and Chief Financial Officer of Computer CurriculumCorporation, an educational software company that was a division of Viacom. Mr. Slaterwas V.P of Financial Planning at Simon & Schuster from December 1985though September 1991. Prior to that Mr. Slater was Controller ofRevlon’s Professional Products Group.

*Mr. Yuzdepski*has served as Chief Marketing Officer since October 2004 and in June 2005was appointed to Executive Vice President and General Manager of the TelecomSolutions Divisions. Prior to joining Symmetricom, Mr. Yuzdepski was VicePresident of Sales and Marketing at Alloptic Inc. in 2004, and between 2002 and2004  Mr. Yuzdepski was VicePresident and General Manager of Openwave Inc.’s Messaging Group. Prior tojoining Openwave Mr. Yuzdepski was a Vice President at Sprint Corporationwhere he led product management and development for the Sprint PCS Division.

*Dr. Bromage*has served as Executive Vice President and General Manager of the Time, 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*has served as Sr. VP Global Sales & Support since October 2004and has held a variety of senior positions with global business responsibilitiesincluding assignments in Europe and North America. Her experience covers abroad spectrum of general management, sales, and marketing roles in rapidlydeveloping markets. Previous positions include that of President and CEO ofJovial Test 

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Equipment,a sixteen year career with Nortel Networks where she held titles of President,Micom Communications Corporation (a Nortel subsidiary), Vice President BusinessSegments, Vice President Sales and Marketing Wiltel (Nortel’s largestenterprise distributor) and Director Marketing for Europe, Middle East andAfrica.

**PART II**

**Item 5.     *Market for the Registrant’sCommon Stock, Related Stockholder Matters and Issuer Purchases of EquitySecurities***

Our common stock is traded on the Nasdaq NationalMarket, under the symbol “SYMM”. We had approximately 1,292 stockholders ofrecord as of August 31, 2005.

Thefollowing table sets forth the high and low per share sale prices reported onthe Nasdaq National Market for our common stock for the periods indicated.
| ** **                     | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|----------|------------|---------|------------|
| Year ended June 30,  2004 |       |     |       |    |       |
| First Quarter                  |       | $        | 7.15       |    | $          | 4.10 |   |
| Second Quarter                 |       | 7.70     |       | 5.91    |       |
| Third Quarter                  |       | 11.00    |       | 6.98    |       |
| Fourth Quarter                 |       | 10.00    |       | 7.13    |       |
| 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    |       |
|                                |            |          |            |         |            |  |  |

 

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 18, 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. As of June 30, 2005,there were approximately 0.6 million shares remained eligible forrepurchase. There were approximately 46.3 million shares of Symmetricom commonstock outstanding as of June 30, 2005.

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Thefollowing table provides monthly detail our share repurchases and forfeituresduring fiscal 2005:
| ** **                                            | ** ** | **Total**          | ** ** | ** **          | ** ** | **Total**          | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **Number of** | ** ** | **Average**         | ** ** | **Number of** | ** ** |
| ** **                                            | ** ** | **Shares**         | ** ** | **Price Paid** | ** ** | **Shares**         | ** ** |
| **Period**                                            | ** ** | ** **         | ** ** | **Purchased**       | ** ** | **per Share** | ** ** | **Forfeited** | ** ** |
| October 1, 2004  through October 31, 2004   |       |               | 17,000     |                |       |               | $          | 9.04 |   |   |   |   |   |   |
| December 1, 2004  through December 31, 2004 |       |               | 45,000     |                |       |               | 9.74       |   |   |   |   |   |   |
| January 1, 2005  through January 31, 2005   |       |               | 25,000     |                |       |               | 8.69       |   |   |   |   |   |   |
| February 1, 2005  through February 28, 2005 |       |               | —     |                |       |               | —     |   |   |   | 14,009 |   |   |
| April 1, 2005  through April 30, 2005       |       |               | 50,000     |                |       |               | 9.80       |   |   |   |   |   |   |
| May 1, 2005 through  May 31, 2005           |       |               | —     |                |       |               | —     |   |   |   | 5,000 |   |   |
| June 1, 2005  through June 30, 2005         |       |               | 49,400     |                |       |               | 10.73      |   |   |   |   |   |   |
| Total                                                 |       |               | 186,400    |                |       |               | $          | 9.82 |   |   |   | 19,009 |   |   |
|                                                       |            |                    |            |                     |            |                    |            |  |  |  |  |  |  |  |  |  |

 

During fiscal 2005, werepurchased 186,400 shares for an aggregate price of approximately $1.8 million.Upon termination of various employees, 19,009 shares of restricted stock wereforfeited pursuant to existing agreements.

**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,**                                | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                         | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net revenue                                                        |       | $                                                                     | 189,147    |   | $ | 172,847 |   | $ | 132,049 |   | $ | 72,643 |   | $ | 152,668 |   |
| Operating income (loss)                                            |       | 19,190                                                                |       | (4,096 | ) | (46,047 | ) | (11,141 | ) | 21,784 |   |
| Income (loss) before  income taxes                                 |       | 20,298                                                                |       | (4,373 | ) | (46,500 | ) | (8,973 | ) | 34,877 |   |
| Income (loss) from  continuing operations                          |       | 17,754                                                                |       | (2,250 | ) | (34,347 | ) | (5,695 | ) | 28,824 |   |
| Gain (loss) from  discontinued operations(1)                       |       | 162                                                                   |       | 13 |   | (14,970 | ) | 410 |   | 506 |   |
| Net earnings (loss)                                                |       | 17,916                                                                |       | (2,237 | ) | (49,317 | ) | (5,285 | ) | 29,330 |   |
| Basic earnings (loss)  per share from continuing operations(2)     |       | 0.39                                                                  |       | (0.05 | ) | (0.96 | ) | (0.25 | ) | 1.23 |   |
| Basic earnings (loss)  per share from discontinued operations(2)   |       | —                                                                |       | — |   | (0.42 | ) | 0.02 |   | 0.02 |   |
| Basic net earnings  (loss) per share(2)                            |       | 0.39                                                                  |       | (0.05 | ) | (1.38 | ) | (0.23 | ) | 1.25 |   |
| Diluted earnings (loss)  per share from continuing operations(2)   |       | 0.38                                                                  |       | (0.05 | ) | (0.96 | ) | (0.25 | ) | 1.15 |   |
| Diluted earnings (loss)  per share from discontinued operations(2) |       | —                                                                |       | — |   | (0.42 | ) | 0.02 |   | 0.02 |   |
| Diluted net earnings  (loss) per share(2)                          |       | 0.38                                                                  |       | (0.05 | ) | (1.38 | ) | (0.23 | ) | 1.17 |   |
| Total assets                                                       |       | 392,171                                                               |       | 247,590 |   | 233,890 |   | 130,310 |   | 155,403 |   |
| Long-term obligations                                              |       | 126,967                                                               |       | 8,827 |   | 10,057 |   | 6,574 |   | 7,184 |   |
| Stockholders’ equity                                          |       | 226,175                                                               |       | 196,484 |   | 183,432 |   | 104,189 |   | 120,117 |   |
|                                                                    |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Reflects amounts relatedto gains (losses) on discontinued operations. The Trusted Time Division wasdiscontinued in fiscal 2003 and the Linfinity business was sold in fiscal 1999.The gain in fiscal 2005, 2004 and the loss in fiscal 2003 are from thediscontinued Trusted Time Division. The gain in fiscal 2001 is a result of achange in estimate of the selling expenses of the Linfinity business while thegain in fiscal 2002 represents a release of funds from an escrow account thatwas established in connection with the sale of the Linfinity business.

(2)          Adjustedto reflect the effect of a three-for-two stock split in the form of a stockdividend on August 18, 2000.

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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, utilities, research centers andaerospace markets. We supply solutions for customers who demand reliableproducts and engineering expertise in a variety of applications, includingnetwork synchronization, timing, testing, verification and/or the measurementof a time and frequency-based signal. We design and manufacture rubidiumclocks, crystal oscillators, cesium clocks and hydrogen maser clocks. Ourproducts include 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, internet service providers(ISPs) and communications original equipment manufacturers (OEMs). With thefiscal 2003 acquisition of TrueTime and Datum, we broadened our customer base toinclude aerospace contractors, governments and research facilities.

On June 24, 2005 we entered into a definitiveagreement with Agilent Technologies, Inc. to purchase its Frequency andTime Standards instrumentation product line, including the 5071A cesium primaryfrequency standard. This acquisition is expected to enhance Symmetricom’sposition in the area of cesium standards and to further Symmetricom’sleadership in generating high-precision frequency and timing referencesincluding rubidium, cesium and hydrogen masers. This transaction was to acquireonly certain assets of Agilent Technologies for a cost of approximately $8.0million. The acquisition of assets was accounted for as a purchase and closedon August 1, 2005.

In June 2003, we discontinued the operation ofthe Trusted Time Division and integrated the Broadband Network Division intothe Telecom Solutions Division. The Trusted Time Division was acquired as partof the acquisition of Datum in October 2002. The division has beenaccounted for as a discontinued operation and, accordingly, the results ofoperations have been excluded from continuing operations in the consolidatedstatements of operations. Certain charges related to the discontinuance of thisoperation, including a non-cash impairment charge for goodwill and intangiblesassociated with this business, were taken in fiscal 2003.

On October 29, 2002, we completed our acquisitionof Datum. Each share of Datum common stock outstanding was converted into theright to receive 2.7609 shares of Symmetricom common stock. The aggregateconsideration was approximately 17.4 million shares of our common stock. Theacquisition of Datum was intended to qualify as a tax-free reorganizationwithin the meaning of Section 368(a) of Internal Revenue code and wasaccounted for as a purchase.

On October 15, 2002, we acquired certain assetsfrom NetMonitor. The acquisition was accounted for as an asset purchase. Wepaid $230,000 in cash for the acquired assets and incurred direct acquisitioncosts of approximately $30,000. The net purchase price was allocated totangible assets of $40,000 and existing technology of $220,000.

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On October 4, 2002,we completed our acquisition of TrueTime. Each outstanding common share ofTrueTime was converted into the right to receive 0.43697 of a share ofSymmetricom common stock and cash of $0.84. All vested and unvested outstandingoptions to purchase TrueTime’s common stock were cancelled and surrendered inexchange for cash payment, which totaled $34,000 in the aggregate. The totalconsideration was approximately 2.6 million shares of our common stock and $5.0million in cash. The acquisition of TrueTime was accounted for as a purchase.

**CriticalAccounting Policies, 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 bad debts, inventories, intangible assets, incometaxes, stock options, and warranty obligations. Management bases its estimatesand judgments 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 and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions. Symmetricomconsiders certain accounting policies related to revenue recognition andallowance for doubtful accounts, reserve for warranty, inventory valuation,accounting for income taxes, valuation of investments and valuation ofintangible assets and goodwill to be critical policies due to the estimates andjudgments involved 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 and internationalcustomers includes a signed purchase order or contract and no right of returnof delivered products. Revenue from sales of product and software licenses isrecognized when: (1) we enter into a legally binding arrangement with acustomer; (2) we deliver the products; (3) customer payment is deemedfixed or determinable and free of contingencies or significant uncertainties;and (4) collection is probable. Revenue from post-sale customer support isdeferred and recognized ratably over the term of the support contract. Revenuefrom consulting and training services is recognized as the services areperformed.

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 our 

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customers. For many of ourinternational customers, we require an irrevocable letter of credit to beissued by the customer before the purchase order is accepted. If we determinethat collection of a fee is not reasonably assured, we recognize the revenue atthe time that collection becomes reasonably assured, which is generally uponthe receipt of cash. We commonly have transactions that involve sales of bothproduct and services to our customers. Product revenue is generated from thesale of synchronization and timing equipment with embedded software that isessential to product functionality. We account for these transactions inaccordance with the rules applicable to software revenue recognition.Service revenue is recognized as the services are performed, providedcollection of the related receivable is probable. Our sales to distributors aremade under agreements allowing for returns or credits under certaincircumstances. Accordingly, we defer an 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 the total estimated costs at completionon the individual contracts. Any anticipated losses on contracts arecharged to operations as soon as they are determinable. Revenue recognizedunder cost-plus contracts is recognized on the basis of direct and indirectcosts incurred plus a negotiated profit calculated as a percentage of costs oras performance based award fee. Revenue from long-term contracts is reviewedperiodically, with adjustments recorded in the period in which the revisionsare 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, 

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andtechnological obsolescence. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired. If the inventory value is written down to its net realizable value,and subsequently there is an increased demand for the inventory at a highervalue, the increased value of the inventory is not realized until the inventoryis sold. During fiscal 2005, we charged $1.0 million to cost of goods sold towrite down excess and obsolete inventory.

*Accounting for IncomeTaxes*

The determination of our tax provision is subject tojudgments and estimates due to operations outside the United States, primarilyin Puerto Rico. Net earnings of our Puerto Rico subsidiary are taxed in partunder Internal Revenue Code Section 936, which exempts qualified PuertoRico earnings from federal income tax. Section 936 limits the amount ofqualified Puerto Rico earnings and expires at the end of fiscal year 2006. Thechange in tax law may affect our future tax rate.

The carrying value of ournet deferred tax assets, which is made up of tax deductions, net operating losscarryforwards, and tax credits, assumes we will be able to generate sufficientfuture income to fully realize these assets. We evaluate the weight of allavailable evidence in determining whether it is more likely than not that someportion of the deferred tax assets will not be realized. If we do not generatesufficient future income, the realization of these deferred tax assets may beimpaired, resulting in an additional income tax expense. A portion of our taxcredits is related to stock options and has a valuation allowance because ofuncertainty regarding their realization. If these tax credits are realized, thebenefit will be credited to common stock.

*Valuation of Investments*

We did not carry any investments in public or privatecompanies during fiscal 2004 and 2005.

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, Sarantelwent public in the United Kingdom and began trading on the AIM market of theLondon Stock Exchange under the symbol SLG.  Subsequently, the Company sold the stock ofSarantel Ltd. and recorded a gain of $0.4 million on the investment in June 2005.

*Valuation ofGoodwill*

We perform goodwillimpairment tests in accordance with SFAS no. 142, “Goodwill Impairment,” on anannual basis and between annual tests in certain circumstances for eachreporting unit. Potential goodwill impairment is measured based upon a two-stepprocess. In the first step, we compare the fair value of a reporting unit withits carrying amount, including goodwill. If the fair value of a reporting unitexceeds its carrying amount, goodwill of the reporting unit is considered notimpaired, thus the second step of the impairment test is unnecessary. If thecarrying amount of a reporting unit exceeds its fair value, the second step ofthe goodwill impairment test shall be performed to measure the amount ofimpairment loss, if any. In fiscal 2005 and 2004, no impairment losses wererecorded based on these evaluations. In fiscal 2003, we recorded $14.7 millionof goodwill impairment, $11.6 million of which related to the discontinuance ofthe Trusted Time Division.

*Valuation ofLong-Lived Assets 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 

21

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projectedfuture operating results, significant changes in the manner of our use of theacquired assets or the strategy for our overall business, or significantnegative industry or economic trends. If these criteria indicate that the valueof the intangible asset may be impaired, an evaluation of the recoverability ofthe net carrying value of the asset over its remaining useful life is made. Ifthis evaluation indicates that the intangible asset is not recoverable, the netcarrying value of the related intangible asset will be reduced to fair value.Any such impairment charge could be significant and could have a materialadverse effect on our financial statements if and when an impairment charge isrecorded. If an impairment charge were recognized, the amortization related tointangible assets would decrease during the remainder of the life of the asset.In fiscal 2005, 2004 and 2003, no impairment losses were recorded based onthese evaluations.

**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,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net revenue                                           |       |                                   |       |   |   |   |   |
| Telecom Solutions  Division:                          |       |                                   |       |   |   |   |   |
| Wireline Products                                     |       | 43.9                                   | %          | 41.3 | % | 46.6 | % |
| Wireless/OEM Products                                 |       | 14.7                                   | %          | 20.0 | % | 23.5 | % |
| Global Services                                       |       | 5.1                                    | %          | 4.8 | % | 2.9 | % |
| Specialty Manufacturing/Other                         |       | 5.2                                    | %          | 5.5 | % | 3.8 | % |
| Timing, Test and Measurement Division                 |       | 31.1                                   | %          | 28.4 | % | 23.2 | % |
| Total net revenue                                     |       | 100.0                                  | %          | 100.0 | % | 100.0 | % |
| Cost of products and services                         |       | 51.1                                   | %          | 58.7 | % | 60.8 | % |
| Amortization of  purchased technology                 |       | 2.1                                    | %          | 2.3 | % | 2.4 | % |
| Write-off of  Telmax royalty                          |       | —                                 | %          | — | % | 0.4 | % |
| Integration and  restructuring charges.               |       | —                                 | %          | 3.4 | % | 1.3 | % |
| Gross profit                                          |       | 46.8                                   | %          | 35.7 | % | 35.1 | % |
| Operating  expenses:                                  |       |                                   |       |   |   |   |   |
| Research and development                              |       | 8.6                                    | %          | 9.7 | % | 16.3 | % |
| Selling, general and administrative                   |       | 27.7                                   | %          | 26.5 | % | 35.4 | % |
| Amortization of goodwill and intangibles              |       | 0.3                                    | %          | 0.5 | % | 0.9 | % |
| Integration and restructuring charges                 |       | —                                 | %          | 1.3 | % | 5.1 | % |
| Impairment of goodwill                                |       | —                                 | %          | — | % | 11.1 | % |
| Acquired in-process research and development          |       | —                                 | %          | — | % | 1.2 | % |
| Operating gain (loss)                                 |       | 10.1                                   | %          | (2.4 | )% | (34.9 | )% |
| Gain (loss) on  equity investments, net               |       | 0.2                                    | %          | — | % | (0.3 | )% |
| Interest income                                       |       | 0.8                                    | %          | 0.2 | % | 0.5 | % |
| Interest expense                                      |       | (0.4                                   | )%         | (0.3 | )% | (0.5 | )% |
| Income (loss) before income taxes                     |       | 10.7                                   | %          | (2.5 | )% | (35.2 | )% |
| Income tax  provision (benefit)                       |       | 1.3                                    | %          | (1.2 | )% | (9.2 | )% |
| Income (loss) from continuing operations              |       | 9.4                                    | %          | (1.3 | )% | (26.0 | )% |
| Gain (loss) from  discontinued operations, net of tax |       | 0.1                                    | %          | — | % | (11.3 | )% |
| Net Income (loss)                                     |       | 9.5                                    | %          | (1.3 | )% | (37.3 | )% |

 

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**FiscalYears Ended June 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 consists ofsales of products, software licenses and services sales. Net revenue increased9.4% to $189.1 million in fiscal 2005 from $172.8 million in fiscal 2004. Theincrease in net revenue was attributable to the Wireline Products segmentincrease of  $11.7 million, or 16.3%,which was due primarily to major customers upgrading their networks and growthin international business including a $2.3 million project in Costa Rica. TheTiming, Test and Measurement segment increased $9.9 million, or 20.3%, asmilitary-related purchases of our timing and frequency solutions for mobilecommunication applications drove a significant portion of the sales growth. TheGlobal Services segment revenue increased $1.4 million, or 16.8%,primarily due to product sales volume increase. The SpecialtyManufacturing/Other segment increased of $0.2 million, or 2.3%, due to overallincreases in the electronics industry. These revenue increases were partiallyoffset by a $6.9 million, or 19.9%, reduction in Wireless/OEM segment revenuedue to reported softness in the wireless industry and a product shift towardlower priced, lower performance quartz-based products from higher performance,lower maintenance rubidium-based solutions.

*Cost of products 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 

23

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increase of 16.8% sincethe revenue increase was primarily higher margin services. Cost of products andservices for Specialty Manufacturing/Other products decreased $53,000, or 0.6%,which was in line with flat revenue increase of 2.3%. Cost of products andservices for Timing, Test and Measurement products increased $2.0 million, or8.0%, which was much lower than the revenue increase of 20.3%. This improvementwas due to overhead volume savings, material cost savings, and savings due tothe elimination of higher startup manufacturing costs at Beverly, Massachusettsafter 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           | %          |   |   |   |   |

 

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 revenue commentary. Gross profit for theWireless/OEM products decreased $0.7 million, or 8.3%, which was lower than the19.9% revenue decline for the same period due primarily to the 2004 shutdown ofthe Irvine, California manufacturing facility. Gross profit for Global Servicesincreased $0.7 million, or 19.6%, which was higher than the 16.8% revenueincrease for the same period due to an increase in sales of higher marginservices. Gross profit for the Specialty Manufacturing/Other products increased$0.3 million, or 20.1%, which was lower than the 2.3% revenue increase for thesame period. Gross profit for the Timing, Test and Measurement 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 revenue commentary. In fiscal 2005, gross margin improved $5.9million for the other cost of sales due to the absence of integration andrestructuring charges when compared to the same period of prior 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            | %          |   |   |   |   |
|                                                   |            |                     |            |                |            |  |  |  |  |  |  |

 

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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.

*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 Datum facilityin Austin, Texas. See Note O of our notes to the consolidated financialstatements 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.

*Acquired in-processresearch and development expenses*

During fiscal 2005 and2004, we did not record any purchased in-process research and developmentexpense.

25

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*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. Interest onthe proceeds from sale of our $120 million convertible notes, which startedaccruing 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           | )%         |   |   |   |   |
|                                   |            |                     |            |                |            |  |  |  |  |  |  |

 

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 expenseon our 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 has fluctuated significantlyas a result of recognition of deferred tax assets related to Puerto Ricooperations and a return to full year profitability. Our effective tax rate hasalso been affected by the percentage of qualified Puerto Rico earningscompared to total earnings, as most of our Puerto Rico earnings are taxed underSection 936 of the U.S. Internal Revenue Code, which exempts qualifiedPuerto Rico earnings from federal income taxes. This exemption is subject towage-based and other limitations and expires at the end of fiscal 2006.

26

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*Gain from discontinued operations, net of tax*
| ** **                                                      | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                                      | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                                      | ** ** | **2005**            | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Gain from  discountinued 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 factors above, net income was $17.9million, or $0.39 per basic and $0.38 per diluted share, in fiscal 2005compared to a net loss of $2.2 million, or $0.05 per basic and diluted share,in fiscal 2004.

**FiscalYears Ended June 30, 2004 and 2003**

*Net revenue*
| ** **                            | ** ** | **Year ended  June 30,** | ** ** | **Percentage Change** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**                           | ** ** | **2003**              | ** ** | ** ** |
| Net Revenue *(in thousands):*         | ** ** | ** **                         | ** ** | ** **            | ** ** |   | ** ** | ** ** |   |
| Wireline Products                     |       | $                                  | 71,467     |                  | $          | 61,494 |   |   | 16.2 | **%** |   |
| Wireless/OEM Products                 |       | 34,617                             |       | 30,976                |       |   | 11.8 | ** ** |   |
| Global Services                       |       | 8,315                              |       | 3,852                 |       |   | 115.9 | ** ** |   |
| Specialty Manufacturing/Other         |       | 9,537                              |       | 4,961                 |       |   | 92.2 | ** ** |   |
| Timing, Test and Measurement Division |       | 48,911                             |       | 30,766                |       |   | 59.0 | ** ** |   |
| Total Net Revenue                     |       | $                                  | 172,847    |                  | $          | 132,049 |   |   | 30.9 | **%** |   |
| Percentage of  Revenue                |       | 100.0                              | %          | 100.0                 | %          |   |   | ** ** |   |

 

In fiscal 2004, netrevenue increased by $40.8 million, or 30.9%, from $132.0 million in fiscal2003 to $172.8 million. The increase in net revenue was attributable to the WirelineProducts increased $10.0 million, or 16.2%, due primarily to the full yearimpact of the Datum and TrueTime acquisitions. The Timing, Test and Measurementsegment increased $18.1 million, or 59.0%, as military-related purchases of ourtiming and frequency solutions for mobile communication applications drove asignificant portion of the sales growth. The Global Services segment revenueincreased $4.5 million, or 115.9%, primarily due to product sales volumesincreases. Specialty Manufacturing/Other increased $4.6 million, or 92.2%, dueto overall increases in the electronics industry. Wireless/OEM Products revenueincreased $3.6 million, or 11.8%, due to increased purchases by wirelessequipment manufacturers.

27

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*Cost of product and services*
| ** **                                             | ** ** | **Year ended  June 30,** | ** ** | **Percentage  Change** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **2004**                           | ** ** | **2003**               | ** ** | ** ** |
| Cost of Products and  Services* (in  thousands)*: |       |                               |       |                   |       |   |   |   |   |
| Wireline Products                                      |       | $                                  | 37,084     |                   | $          | 39,392 |   |   | (5.9 | )% |   |
| Wireless/OEM Products                                  |       | 25,781                             |       | 21,773                 |       |   | 18.4 |   |   |
| Global Services                                        |       | 4,832                              |       | 794                    |       |   | 508.6 |   |   |
| Specialty Manufacturing/Other                          |       | 8,168                              |       | 4,166                  |       |   | 96.1 |   |   |
| Timing, Test and Measurement Division                  |       | 25,545                             |       | 17,293                 |       |   | 47.7 |   |   |
| Other cost of sales                                    |       | 9,773                              |       | 2,300                  |       |   | 324.9 |   |   |
| Total Cost                                             |       | $                                  | 111,183    |                   | $          | 85,718 |   |   | 29.7 | % |   |
| Percentage of Revenue                                  |       | 64.3                               | %          | 64.9                   | %          |   |   |   |   |

 

In fiscal 2004, cost of products and services,including other cost of sales, increased $25.5 million, or 29.7%, from $85.7million to $111.2 million in fiscal 2003. This increase was consistent with therevenue increase of 30.9% for the same period. Cost of products and servicesfor Wireline products decreased $2.3 million, or 5.9%, while Wirelineproducts revenue increased 16.2%. The improvement in Wireline products cost wasdue to overhead volume savings, material cost reductions and favorable mix dueto increased revenue on higher margin products. Cost of products and servicesfor Wireless/OEM products increased $4.0 million, or 18.4%, compared to arevenue increase of 11.8%. This increase was primarily due to the December 2003closure of the higher cost Irvine, California manufacturing facility andrelocation to the Beverly, Massachusetts’ facility. Cost of products andservices for Global Services increased $4.0 million, or 508.6%, compared to arevenue increase of 115.9%. The increase in cost was due to sales volumeincreases in higher margin services. Cost of products and services forSpecialty Manufacturing/Other products increased $4.0 million, or 96.1%, whichwas consistent with the revenue increase of 92.2%. Cost of products andservices for Timing, Test and Measurement increased $8.3 million, or 47.7%,compared to revenue increase of 59.0%. The increase was due to overhead savingsdue to higher volume, material cost savings and lower costs due to the 2004shutdown of the Irvine, California manufacturing facility and relocation toBeverly, Massachusetts.

Other cost of sales, whichincludes amortization of purchased technology, increased insignificantly fromfiscal 2003 to fiscal 2004. Integration and restructuring charges increased by$4.1 primarily due to the closure of the Irvine, California manufacturingfacility and the move of production to Beverly, Massachusetts.

*Gross profit*
| ** **                            | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Gross Profit *(in thousands)*:        |       |                |       |           |       |   |   |   |   |
| Wireline Products                     |       | $                   | 34,383     |           | $          | 22,102 |   |   | 55.6 | % |   |
| Wireless/OEM Products                 |       | 8,836               |       | 9,203          |       |   | (4.0 | ) |   |
| Global Services                       |       | 3,483               |       | 3,058          |       |   | 13.9 |   |   |
| Specialty Manufacturing/Other         |       | 1,369               |       | 795            |       |   | 72.2 |   |   |
| Timing, Test and Measurement Division |       | 23,366              |       | 13,473         |       |   | 73.4 |   |   |
| Other cost of sales                   |       | (9,773              | )          | (2,300         | )          |   | 324.9 |   |   |
| Total Gross Profit                    |       | $                   | 61,664     |           | $          | 46,331 |   |   | 33.1 | % |   |
| Percentage of  Revenue                |       | 35.7                | %          | 35.1           | %          |   |   |   |   |

 

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In fiscal 2004, grossprofit, excluding other cost of sales, increased $15.3 million, or 33.1%,compared to fiscal 2003. This increase was consistent with the revenue increaseof 30.9%. Gross profit for the Wireline Products increased $12.3 million, or55.6%, which was higher than the 16.2% revenue increase for the same period dueto the improvements mentioned in the cost of revenue commentary. Gross profitfor the Wireless /OEM products decreased $0.4 million, or 4.0%, which was lowerthan the 11.8% revenue increase in the same period primarily due to the 2004shutdown of the Irvine, California manufacturing facility. Gross profit forGlobal Services increased $0.4 million, or 13.9%, which was lower than the115.9% revenue increase for the same period due to an increase in sales volume.Gross profit for the Specialty Manufacturing/Other products increased $0.6million, or 72.2%, which was lower than 92.2% revenue increase for the sameperiod. Gross profit for the Timing, Test and Measurement products increased$9.9 million, or 73.4%, which was higher than the 59.0% revenue increasefor the same period due to the savings mentioned in the cost of revenuecommentary. In fiscal 2004, gross margin decreased by $7.5 million, or324.9%, of revenue for the other cost of sales primarily due to the closure ofthe Irvine, California manufacturing facility and the move of production toBeverly, Massachusetts.

*Operating Expense*

*Research and development*
| ** **                                        | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                        | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                        | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Research and  development expense*(in thousands)* |       | $                   | 16,772     |           | $          | 21,468 |   |   | (21.9 | )% |   |
| Percentage of Revenue                             |       | 9.7                 | %          | 16.3           | %          |   |   |   |   |
|                                                   |            |                     |            |                |            |  |  |  |  |  |  |

 

Research and developmentexpenses consist primarily of salaries and benefits, prototype expenses, andfees paid to outside consultants. Research and development expenses decreased21.9% to $16.8 million in fiscal 2004 from $21.5 million in fiscal 2003.The $4.7 million decrease in research and development expenses was primarilydue to reductions in headcount and expenses for the Broadband Network Divisionand due to headcount and expense reductions in San Jose, California; Austin,Texas and Irvine, California related primarily to the synergies from theacquisitions.

*Selling, general and administrative includingamortization of intangibles*
| ** **                                                                                       | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                                                                       | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                                                                       | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Selling, general  and administrative including amortization of intangibles* (in thousands)* |       | $                   | 46,663     |           | $          | 47,915 |   |   | (2.6 | )% |   |
| Percentage of  Revenue                                                                           |       | 27.0                | %          | 36.3           | %          |   |   |   |   |
|                                                                                                  |            |                     |            |                |            |  |  |  |  |  |  |

 

Selling, general andadministrative expenses consist primarily of salaries, benefits, salescommissions and travel related expenses for our sales and services, finance,human resources, information technology and facilities departments. Selling,general and administrative expenses decreased 2.6% to $46.7 million in fiscal2004 from $47.9 million in fiscal 2003. In fiscal 2004, we had a total of 187employees in our selling, general and administrative departments, compared to229 employees in fiscal 2003. The decrease in headcount resulted fromrestructuring plans for the integration of TrueTime and Datum. However, expensesdecreased by only 2.6% because the savings from headcount reductions werepartially offset by $0.9 million of costs related to our compliance process forthe Sarbanes-Oxley Act of 2002 and $0.3 million in severance expenses.

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*Integration and restructuring charges*
| ** **                                             | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                             | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                             | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Integration and  restructuring charges*(in thousands)* |       | $                   | 2,325      |           | $          | 6,711 |   |   | (65.4 | )% |   |
| Percentage of  Revenue                                 |       | 1.3                 | %          | 5.1            | %          |   |   |   |   |
|                                                        |            |                     |            |                |            |  |  |  |  |  |  |

 

During fiscal 2004, werecorded integration and restructuring charges of $2.3 million inacquisition-related costs and other restructuring expenses. Of these costs,$1.6 million was related to our facility restructuring in Irvine, Californiaand $0.7 million was 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 restructuringcharges.

*Impairment of goodwill*
| ** **                               | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                               | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                               | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Impairment of  goodwill*(in  thousands)* |       |                | $          | —         |       |   | $ | 14,723 |   |   | (100.0 | )% |   |
| Percentage of  Revenue                   |       |                | —     | %              |       | 11.1 | % |   |   |   |   |
|                                          |            |                     |            |                |            |  |  |  |  |  |  |  |  |

 

We performed our annual goodwill impairment test as ofJune 30, 2004 and determined that goodwill was not impaired.

During fiscal 2003 we recorded a goodwill impairmentcharge of $14.7 million. We completed the acquisition of TrueTime and Datumduring the second quarter of fiscal 2003. In connection with the acquisitionsof TrueTime and Datum during the second quarter of fiscal 2003, we recorded anadditional $72.8 million of goodwill. This goodwill was based upon the valuesassigned to the transactions at the time they were announced, March 2002for TrueTime and May 2002 for Datum, using a Symmetricom stock price of$6.20 and $5.69 per share, respectively. At the end of the second quarter offiscal 2003 on December 31, 2002, when the Symmetricom stock price was$4.22, which represented a decline of 31.9% and 25.8% from the Symmetricomstock price as of the acquisition announcement dates for TrueTime and Datum,respectively, management determined that goodwill was likely impaired asforecasts for anticipated revenue growth for the telecommunications industryhad declined since the transactions were valued.

We compared the fair values of the reporting units totheir respective carrying values and determined that the carrying values fortwo of the reporting units were impaired. The fair values of the reportingunits were estimated using the present value of estimated future cash flowsbased on management’s estimates of future revenues. We recorded the $14.7million excess of the carrying value of the reporting units goodwill over itsimplied fair value as an impairment loss in accordance with SFAS No. 142, “Goodwilland Other Intangible Assets.”

During fiscal 2003, inaddition to the goodwill impairment test performed as of December 31,2003, we performed our annual goodwill impairment test for fiscal 2003 as of June 30,2003, and determined that goodwill from continuing operations was not impaired.However, due to the discontinued operations of the Trusted Time Division, werecorded an impairment charge from continuing operations of $11.6 million forgoodwill associated with that division.

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*Acquired in-process research and development expenses*
| ** **                                                    | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                                    | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                                    | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Acquired in  process research and development*(in thousands)* |       |                | $          | —         |       |   | $ | 1,561 |   |   | (100.0 | )% |   |
| Percentage of  Revenue                                        |       |                | —     | %              |       | 1.2 | % |   |   |   |   |
|                                                               |            |                     |            |                |            |  |  |  |  |  |  |  |  |

 

During fiscal 2004, we did not record any purchasedin-process research and development expense. During fiscal 2003, $1.6 millionof the purchase price of the Datum and TrueTime acquisitions was allocated topurchased in-process research and development expense based upon the valuesassigned to the acquisitions. Projects that qualify as in-process research anddevelopment represent those that have not yet reached technological feasibilityand have no alternative future use. Technological feasibility is defined asbeing equivalent to a beta-phase working prototype in which there is noremaining risk relating to the development. The $1.6 million represented $1.2million from Datum and $0.4 million from TrueTime. The projected value of theseprojects was determined by estimating the discounted net cash flows from thesale of the products resulting from the completion of the projects, reduced bythe portion of the revenue attributable to developed technology and thepercentage of completion 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.

*Loss on sale of equity investments*
| ** **                                        | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                        | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                        | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Loss on equity  investments, net *(in thousands)* |       |                | $          | —         |       |   | $ | (450 | ) |   | (100.0 | )% |   |
| Percentage of  Revenue                            |       |                | —     | %              |       | (0.3 | )% |   |   |   |   |
|                                                   |            |                     |            |                |            |  |  |  |  |  |  |  |  |

 

During fiscal 2003, werecorded a net loss of $0.5 million on the sale of equity investments primarilydue to impairment losses on investment in Sarantel Ltd. During fiscal 2004, wedid not sell any equity investments.

*Interest income*
| ** **                       | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|----------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                       | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                       | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Interest income *(in thousands)* |       | $                   | 308        |           | $          | 625 |   |   | (50.7 | )% |   |
| Percentage of  Revenue           |       | 0.2                 | %          | 0.5            | %          |   |   |   |   |
|                                  |            |                     |            |                |            |  |  |  |  |  |  |

 

Interest income decreased50.7% to $0.3 million in fiscal 2004 from $0.6 million in fiscal 2003. Thisdecrease was primarily due to a lower average cash balance during the firstthree quarters of fiscal 2004, as well as lower average interest rates duringfiscal 2004 compared to fiscal 2003.

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*Interest expense*
| ** **                        | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|-----------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                        | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                        | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Interest expense *(in thousands)* |       | $                   | (585       | )              | $          | (628 | ) |   | (6.8 | )% |   |
| Percentage of  Revenue            |       | (0.3                | )%         | (0.5           | )%         |   |   |   |   |
|                                   |            |                     |            |                |            |  |  |  |  |  |  |

 

Interest expense consistsprimarily of interest on our capital lease for our headquarters building in SanJose, California. Interest expense remained consistent at $0.6 million infiscal 2004 and 2003.

*Income tax benefit*
| ** **                           | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                           | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                           | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Income tax  benefit*(in  thousands)* |       | $                   | (2,123     | )              | $          | (12,153 | ) |   | (82.5 | )% |   |
| Percentage of  Revenue               |       | (1.2                | )%         | (9.2           | )%         |   |   |   |   |
|                                      |            |                     |            |                |            |  |  |  |  |  |  |

 

Our income tax benefit was$2.1 million (effective tax rate of 48.5%) in fiscal 2004 compared to an incometax benefit of $12.2 million (effective tax rate of 26.1%) in fiscal 2003. Theeffective tax rate has fluctuated significantly as a result of the impact ofthe fiscal 2003 write-off or impairment of non-deductible goodwill anddisposition of business lines. Our effective tax rate has also been affected bythe percentage of qualified Puerto Rico earnings compared to totalearnings, as most of our Puerto Rico earnings are taxed under Section 936of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earningsfrom federal income taxes. This exemption is subject to wage-based and otherlimitations and expires at the end of fiscal 2006.

*Gain (loss) from discontinued operations, net of tax*
| ** **                                                             | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                                             | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                                             | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Gain (loss) from  discountinued operations, net of tax*(in thousands)* |       |                | $          | 13             |       |   | $ | (14,970 | ) |   | (100.1 | )% |   |
| Percentage of  Revenue                                                 |       |                | —     | %              |       | (11.3 | )% |   |   |   |   |
|                                                                        |            |                     |            |                |            |  |  |  |  |  |  |  |  |

 

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 ofoperations. During fiscal 2004, we recorded a gain of $13,000 from ourdiscontinued operations. During fiscal 2003, we recorded a $15.0 million loss,or $0.42 per share, net of taxes, of which $12.7 million was due to the loss ondisposal, and $2.3 million were operational losses. The loss from disposalconsisted of an $11.6 million goodwill impairment charge and a $1.1 millionimpairment charge for intangible assets.

*Net loss*
| ** **               | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|--------------------------|------------|---------------------|------------|----------------|------------|
| ** **               | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **               | ** ** | **2004**            | ** ** | **2003**       | ** ** | **Change** | ** ** |
| Net loss*(in thousands)* |       | $                   | (2,237     | )              | $          | (49,317 | ) |   | (95.5 | )% |   |
| Percentage of  Revenue   |       | (1.3                | )%         | (37.3          | )%         |   |   |   |   |
|                          |            |                     |            |                |            |  |  |  |  |  |  |

 

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As a result of the factorsabove, we incurred a net loss of $2.2 million, or $0.05 per basic and dilutedshare, in fiscal 2004 compared to a net loss of $49.3 million, or $1.38 perbasic and diluted share, in fiscal 2003.

**Key Operating Metrics**

Key operating metrics formeasuring our performance include sales backlog, contract revenue, headcountand deferred revenue. These metrics, which compare fiscal 2005 with fiscal2004, 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 $31.0 million as of June 30, 2005, compared to $41.8 millionas of June 30, 2004. Our backlog, which is shippable within the next sixmonths, was $20.5 million as of June 30, 2005, compared to $27.9 millionas of June 30, 2004.

*Contract revenue:*

Revenue from contracts that require development andmanufacture in accordance with customer specifications and have a lengthydevelopment period may be categorized into two types: firm fixed price andcost-plus reimbursement. Revenue is recognized under the fixed price contractsusing the percentage of completion method, (cost-to-cost basis) principallybased upon the costs incurred relative to the total 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. As of June 30, 2005, we have approximately $4.7million in contract revenue to be performed and recognized within the next 36months, compared to approximately $3.4 million in contract revenue that was tobe performed and recognized within the following 36 months as of June 30,2004. These amounts have been accounted for as part of our sales backlogdiscussed above.

*Headcount:*

Our consolidated headcountas of June 30, 2005 was comprised of 779 regular employees and 51temporary employees, compared to 754 regular employees and 125 temporaryemployees as of June 30, 2004.

*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 $0.2 million as of June 30, 2005,compared to $0.6 million as of June 30, 2004. Deferred revenue formaintenance contracts was $1.4 million as of June 30, 2005, compared to$0.8 million as of June 30, 2004. Deferred revenue for distributor returnallowances was $0.6 million as of June 30, 2005, compared to $0.7 millionas of June 30, 2004.

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**Liquidity and Capital Resources**

As of June 30, 2005, working capital was $223.1million compared to $72.3 million as of June 30, 2004. Cash and cashequivalents as of June 30, 2005 increased $71.4 million to $105.6 millionfrom $34.2 million as of June 30, 2004. This increase was primarily theresult of $27.2 million in cash provided by operating activities, $77.5 millionin cash used for investing activities and $121.7 million in cash provided byfinancing activities. Short-term investments increased from $13.4 million as ofJune 30, 2004 to $89.5 million as of June 30, 2005. This increaseresulted primarily from the issuance of convertible notes and the fact that wedecided to invest more in short-term investments during fiscal 2005.

The $27.2 million net cash provided by operatingactivities in fiscal 2005 was primarily attributable to a net profit of $17.9million and non-cash expenses related to depreciation and amortization of $11.3million, which was partially offset by a $0.1 million increase in accountsreceivable and $2.7 million increase in accounts payable. The increase inaccounts receivable was the result of higher sales during the fiscal 2005compared to fiscal 2004. The $77.5 million net cash used for investingactivities in fiscal 2005 was primarily attributable to $83.5 million inpurchases of short-term investments and $3.1 million in purchases of plant andequipment, which was partially offset by $7.5 million in maturities ofshort-term investments and $1.6 million proceeds from the sale of a building inAustin. The $121.7 million net cash provided by financing activities wasprimarily attributable to $8.0 million in proceeds from the issuance of commonstock due to stock option exercises and $116.2 million proceeds from aconvertible note arrangement initiated in June 2005, which was offset by$1.8 million repurchase of common stock and $1.1 million for repayment of longterm obligation.

Our total capital spending commitments outstanding asof June 30, 2005 were $1.4 million. Days sales outstanding in accountsreceivable was 58 days as of June 30, 2005, an increase from 53 days as ofJune 30, 2004 due to higher percentage of revenue in the last quarter offiscal 2005.

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 thanwe expect, we may take steps to reduce our operating expenses accordingly. Ifcash generated from operations is insufficient to satisfy our liquidityrequirements or if we require additional capital resources to grow our businessor to acquire complementary technologies and businesses in the future, we mayseek to issue 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 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 Notesis payable semi-annually in June and December of each year beginningon December 15, 2005. The Notes are unsecured obligations and aresubordinated in right of payment to all of our existing and future senior debt,including our indebtedness under our senior credit facilities. The Notes arestructurally subordinated to all indebtedness and liabilities of oursubsidiaries.

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 30thtrading 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 2, 2005, the reported closing bid price ofour common stock was $9.91 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 liquidateddamages, if any) up to but not including the date of repurchase, payable incash, plus, in the event of certain change of 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. The line of creditcontains certain financial covenants and restrictions. The new line of creditexpires on November 1, 2006. No borrowings were outstanding as of June 30,2005.

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, 2005, the bond balance was $2.5million.

**Contractual Obligations**

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, 2005, the bond balance was $2.5 million.

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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 noncancelable leases as a result of the economic downturn, wesubleased certain facilities and recognized lease loss liability for the remainder.

We incur purchase commitments during our normal courseof business. As of June 30, 2005, our principal commitments totaled $13.8million and related primarily to commitments to purchase inventory.

In connection with the Datum acquisition, we assumed Datum’spost-retirement health care benefits plan. Post-retirement benefits arerecognized over the employee’s service period based on a 5.1% 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 30,2005, 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                          |       | $                                         | 2,475      |   |   | $ | 70 |   |   | $ | 140 |   |   | $ | 140 |   |   | $ | 2,125 |   |
| Convertible  subordinate notes        |       | 120,000                                   |       |   | — |   |   | — |   |   | — |   |   | 120,000 |   |
| Capital lease  obligations            |       | 5,805                                     |       |   | 1,412 |   |   | 3,068 |   |   | 1,325 |   |   | — |   |
| Operating leases  obligations(1)      |       | 22,683                                    |       |   | 2,374 |   |   | 5,304 |   |   | 4,230 |   |   | 10,775 |   |
| Purchase  obligations                 |       | 13,847                                    |       |   | 11,140 |   |   | 2,707 |   |   | — |   |   | — |   |
| Post-retirement  benefits liabilities |       | 415                                       |       |   | 45 |   |   | 150 |   |   | 85 |   |   | 135 |   |
| Lease loss  accrual                   |       | 946                                       |       |   | 667 |   |   | 193 |   |   | 73 |   |   | 13 |   |
| Total contractual cash obligations    |       | 166,171                                   |       |   | 15,708 |   |   | 11,562 |   |   | 5,853 |   |   | 133,048 |   |
| Sublessor  agreements                 |       | (2,916                                    | )          |   | (594 | ) |   | (1,163 | ) |   | (884 | ) |   | (275 | ) |
| Net                                   |       | $                                         | 163,255    |   |   | $ | 15,114 |   |   | $ | 10,399 |   |   | $ | 4,969 |   |   | $ | 132,773 |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

**Recent Accounting Pronouncements**

The FASB issued Interpretation No. 46, or FIN 46,“*Consolidation of Variable InterestEntities,*” in January 2003, and a revised interpretation of FIN46, or FIN 46R, in December 2003. FIN 46 requires certain variableinterest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. The adoption of FIN 46R in the second quarterof fiscal year 2004 did not have an impact on our financial position, resultsof operations or cash flows.

In December 2003, the Securities ExchangeCommission, or the SEC, issued Staff Accounting Bulletin No. 104, *Revenue Recognition,* or SAB 104, whichcodifies, revises and rescinds certain sections of SAB 101, “*Revenue Recognition in Financial Statements*,”in order to make this interpretive guidance consistent with currentauthoritative accounting and auditing guidance and SEC rules andregulations. The adoption did not have a material effect on our operatingresults or financial condition.

In March 2004, the EITF reached a final consensuson Issue 03-01, “*The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments*,”to provide additional guidance in determining whether investment securitieshave an impairment, which should be considered, other-than-

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temporary. The adoption ofIssue 03-01 did not have an effect on our operating results or financialcondition.

In December 2004, the FASB issued SFAS No. 123(revised 2004),*“Share-Based Payment”*(FAS 123R) that addresses the accounting for share-based payment transactionsin which an enterprise receives employee services in exchange for either equityinstruments of the enterprise or liabilities that are based on the fair valueof the enterprise’s equity instruments or that may be settled by the issuanceof such equity instruments. The statement eliminates the ability to account forshare-based compensation transactions using the intrinsic value method asprescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accountingfor Stock Issued to Employees,” and generally requires that such transactionsbe accounted for using a fair-value-based method and recognized as expenses inour consolidated statement of income. The statement requires companies toassess the most appropriate model to calculate the value of the options. Wecurrently use the Black-Scholes option pricing model to value options and arecurrently assessing which model we may use in the future under the statementand may deem an alternative model to be the most appropriate. The use of adifferent model to value options may result in a different fair value than theuse of the Black-Scholes option pricing model. In addition, there are a numberof other requirements under the new standard that will result in differingaccounting treatment than currently required. These differences include, butare not limited to, the accounting for the tax benefit on employee stockoptions and for stock issued under our employee stock purchase plan. Inaddition to the appropriate fair value model to be used for valuing share-basedpayments, we will also be required to determine the transition method to beused at date of adoption. The allowed transition methods include prospectiveand retroactive adoption methods. Under the retroactive methods, prior periodsmay be restated either as of the beginning of the year of adoption or for allperiods presented. The prospective method requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of FAS 123R, while the retroactive methodswould record compensation expense for all unvested stock options and restrictedstock beginning with the first period restated. The effective date of the newstandard for our consolidated financial statements is the first quarter offiscal 2006, which begins on July 4, 2005.

Upon adoption, this statement will have a significantimpact on our consolidated financial statements because we will be required toexpense the fair value of our stock option grants and stock purchases under ouremployee stock purchase plan rather than disclose the impact on ourconsolidated net income within our footnotes as is our current practice (seeNote A of the Notes to Consolidated Financial Statements contained herein). Theamounts disclosed within our footnotes are not necessarily indicative of theamounts that will be expensed upon the adoption of FAS 123R. Compensationexpense calculated under FAS 123R may differ from amounts currently disclosedwithin our footnotes based on changes in the fair value of our common stock,changes in the number of options granted or the terms of such options, thetreatment of tax benefits and changes in interest rates or other factors. Inaddition, upon adoption of FAS 123R we may choose to use a different valuationmodel to value the compensation expense associated with employee stock options.

In December 2004, the FASB issued FinancialAccounting Standard No.151, “*Inventory Cost,an amendment of ARB No. 43*, *Chapter4*.” FAS 151clarifies the accounting for inventory when there areabnormal amounts of idle facility expense, freight, handling cost, and wastedmaterial. Under existing GAAP, items such as idle facility expense, excessivewasted material (spoilage), double freight, and re-handling cost may be “soabnormal” as to require treatment as current period charges rather thanrecorded as adjustment to the value of the inventory. FAS 151 requires thatthose items be recognized as current-period charges regardless of whether theymeet the criterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the cost of conversion be based onthe normal capacity of the production facilities. The provision of thisStatement will be effective for inventory 

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cost incurred after June 30,2005. The adoption of FAS 151 is not expected to have a material effect on ourfinancial position or result of operations.

In December 2004, the FASB staff issued FSP FAS109-1, “*Application of FASB Statement No. 109*,*Accounting for Income Taxes*,” tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004 (the “FSP”) to provide guidance on the application ofStatement 109 to the provision within the American Jobs Creation Act of 2004(the “Act”) that provides tax relief to U.S. domestic manufacturers. The FSPstates that the manufacturers deduction provided for under the Act should beaccounted for as a special deduction in accordance with Statement 109 and notas a tax rate reduction. A special deduction is accounted for by recording thebenefit of the deduction in the year in which it can be taken in the company’stax return, rather than by adjusting deferred tax assets and liabilities in theperiod of the Act’s enactment (which would have been done if the deduction onqualified production activities were treated as a change in enacted tax rates).The FSP was effective upon issuance. The adoption of the FSP did not have amaterial impact on our financial position or results of operations. We arecurrently evaluating the future effects of the FSP.

In December 2004, the FASB issued Statement ofAccounting Standards (SFAS) No. 153, “*Exchangesof Nonmonetary Assets—An Amendment of APB Opinion No. 29*.” SFASNo. 153 is based on the principle that nonmonetary asset exchanges shouldbe recorded and measured at the fair value of the assets exchanged, withcertain exceptions. This standard requires exchanges of productive assets to beaccounted for at fair value, rather than at carryover basis, unless (1) neitherthe asset received nor the asset surrendered has a fair value that isdeterminable within reasonable limits or (2) the transactions lackcommercial substance. SFAS No. 153 is effective for any nonmonetary assetexchanges occurring after June 30, 2005. Adoption of SFAS No. 153 isnot expected to have a material impact on our consolidated financial position,results of operations or cash flows.

In May 2005, the FASBissued SFAS No. 154, “*AccountingChanges and Error Corrections*.” FASB Statement of AccountingStandards (SFAS) No. 154 establishes new standards on accounting forchanges in accounting principles. Pursuant to the new rules, all such changesmust be accounted for by retrospective application to the financial statementsof prior periods unless it is impracticable to do so. The Statement iseffective for accounting changes and error corrections made in fiscal yearsbeginning after December 15, 2005, with early adoption permitted forchanges and corrections made in years beginning after May 2005. Adoptionof SFAS No. 154 is not expected to have a material impact on ourconsolidated financial position, results of operations or cash flows.

**Factors That May Affect Results**

***We have relied andmay continue to rely on a limited number of customers for a significant portionof our net revenue, and our revenue could decline due to the delay of customerorders or cancellation of existing orders***

Although a relativelysmall number of customers have historically accounted for a significant portionof our net revenue, no single customer accounted for 10% or more of our netrevenue during the fiscal year ended June 30, 2005 or fiscal 2004.However, we expect that we will continue to depend on a relatively small numberof customers for a substantial portion of our net revenue for the foreseeablefuture. The timing and level of sales to our largest customers have fluctuatedsignificantly 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, mayharm our business and operating results. Major customers also have significantleverage and may attempt to change the terms, including pricing, upon which wedo business, which could also harm our business 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 16% of our net revenue was 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 todevelop new products, or we are delayed in production startup, our sales coulddecline***

The markets for ourproducts are characterized by:

·       rapidlychanging technology;

·       evolvingindustry standards;

·       changesin end-user requirements;

·       frequentnew product introductions; 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 process requiringthe accurate anticipation of technological and market trends. We may experiencedesign, manufacturing, marketing and other difficulties that could delay orprevent the development, introduction or marketing of our new products andenhancements.

We believe that the need for synchronization is movingfurther out from the core of the network (where our products are currentlyused) to the “edge of the network.” If this occurs, the products needed to meetthe synchronization at the edge of the network will probably be products soldat lower price points, with fewer features and may be sold through OEM andredistributor markets. This would mean that competition may be greater, unitvolume might increase, and gross margins may be lower.

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.

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

Competition in thetelecommunications industry in general, and in the markets we serve, is intenseand likely to increase substantially. We face competition in all of our markets.Competitors in our synchronization products segment include FrequencyElectronics, Inc., Huawei Technologies Co. Ltd., Emrise Corp., andOscilloquartz SA. Competitors in our wireless segment include Frequency 

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Electronics, Inc.and Trimble Navigation, Ltd. In the enterprise network timing and frequencymarket, we compete primarily with Meinberg and EndRun Technologies. In thecesium standards market, we compete primarily with Agilent Technologies, Inc.In the rubidium oscillators market, we compete primarily with FrequencyElectronics, Inc., SRR and Temex. In addition, certain companies, such asPerkin Elmer, Inc., that currently manufacture products for use inmilitary applications could enter commercial markets and compete directly withus. Competitors in our timing and frequency, test and measurement segmentinclude Frequency Electronics, Inc., Trak Systems, Inc. (a VeritasCorporation subsidiary) and Brandywine Communications. In addition, theTelecommunications Act of 1996 permits ILECs to manufacture telecommunicationsequipment, which may result in increased competition. Our ability to competesuccessfully in the future will depend 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.

Many 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,promotion and sale of products, or to deliver competitive products at lowerprices. We expect to continue to experience pricing pressures from ourcompetitors in all of our markets. If we are unable to compete by deliveringnew products or by delivering competitive products at lower prices, we could losemarket share and our 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 andresult in 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 fluctuateinclude:

·       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;

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

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·       changesin our products or mix of sales to customers;

·       although,we have been selected as a supplier in RFPs from several major wirelinecustomers, 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 manage fluctuations, especially declines, in the average sellingprices 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;

·       theneed for synchronization at the edge of the network;

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

·       ourability to establish in a timely fashion subsidiaries in new geographicregions, which our customers or potential customers may require to do businesswith us in those regions;

·       internationalcustomers may delay purchasing products for increased voice, data and videotraffic;

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

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

·       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.

A significant portion ofour operating and manufacturing expenses are relatively fixed in nature andplanned expenditures are based in part on anticipated orders. If we are unableto adjust spending in a timely manner to compensate for any unexpected futuresales shortfall, our operating results will be negatively impacted. Ouroperations entail a high level of fixed costs and require an adequate volume ofproduction and sales to achieve and maintain reasonable gross profit marginsand net earnings. If we 

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increasethe volume of product manufacturing by outside sources and decrease ourinternal 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 of these markets may depend onchanges in general economic conditions; conditions related to the markets inwhich we compete, changes in regulatory conditions, legislation, export rules orconditions, interest rates and fluctuations in the business cycle for anyparticular market segment. If our quarterly or annual operating results do notmeet the expectations of securities analysts and investors, the trading priceof our common stock could decline 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 $17.9 million for the fiscal year ended June 30, 2005, we hadnet losses for the three preceding fiscal years. Future losses may createuncertainty about the recoverability of our $48.7 million net deferred taxassets. If we record a valuation allowance against our deferred tax assets, wewould record an additional tax expense, which would reduce net earnings. Inaddition, these uncertainties about the recoverability of our deferred taxassets would limit our ability to recognize future deferred tax assets on ourbalance 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 the deferredtax assets is needed.

***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 suppliersfor a number of our components, which are key components of our synchronizationand timing and frequency equipment. If single source components were to becomeunavailable on satisfactory terms, we would be required to purchase comparablecomponents from other sources. If for any reason we could not obtain comparablereplacement components from other sources in a timely manner, our business,results of operations and financial condition could be harmed. In addition,some of our suppliers require long lead-times to deliver requested quantitiesof components. If we are unable to obtain sufficient quantities of components,we could experience delays or reductions in product shipments, which could alsohave a material adverse effect on our business, result of operations and financialcondition. Due to rapid changes in technology, on occasion, one or more of thecomponents used in our products have become unavailable, resulting inunanticipated redesign and related delays in shipments. We cannot assure youthat similar delays will not occur in the future.

***Our products arecomplex and may contain errors or design flaws, which could be costly tocorrect***

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, andincreased service and warranty costs. The occurrence of any of these factorscould cause our net revenue to decline.

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***Our criticalbusiness and manufacturing facilities in Puerto Rico and San Jose, California,as well as many our customers and suppliers are located near known hurricanezones and earthquake fault zones and the occurrence of an earthquake,hurricanes or other catastrophic disaster, could cause damage to our facilitiesand equipment, which could require us, as well as our customers and suppliersto cease, curtail or disrupt operations***

***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. We relyon a combination of trademark, copyright and patent registration, contractualrestrictions and internal security to establish and protect our proprietaryrights. These measures may not provide sufficient protection for our tradesecrets or other proprietary information. We have United States andinternational 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 no assurancethat patents will be issued, or that new, or existing patents will not bechallenged, 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 (one-time) 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;

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·       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;

·       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;

·       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; and

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

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.

***If we sell sharesof our common stock or other equity securities in the future financings,existing common stockholders will experience immediate dilution and, as aresult, our stock price may go down***

We may from time to timeissue additional shares of common stock or other equity securities at adiscount from the current trading price of our common stock. As a result, ourexisting common stockholders will experience immediate dilution upon the purchaseof any shares of our common stock sold at such discount. We may have potentialdilution for our shares with the $120.0 million convertible notes if our stockprice reaches to $12.49 or more per share and our shares would be substantiallydiluted if we would not have sufficient funding to pay off the principal ofnotes or we could not be successful to refinance the notes when the notes arecalled. In addition, as opportunities present themselves, we may enter intofinancing or similar arrangements in the future, including the issuance of debtsecurities, preferred stock or common stock. If we issue common stock orsecurities convertible into common stock, our common stockholders willexperience dilution.

***We are subject toenvironmental regulations that could result 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 or otherwisehazardous chemicals used in our manufacturing process. While we have notexperienced 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 

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or regulations will notoccur in the future as a result of the inability to obtain permits, humanerror, equipment failure or other causes. The liabilities arising from anynoncompliance with environmental regulations, or liability resulting fromaccidental contamination or injury from toxic or hazardous chemicals couldresult in liability that exceeds our resources. The risk of liabilitiesincreases as we acquire other companies, such as Datum, which use, or haveused, hazardous substances at various current or former facilities.

A manufacturing facilitypreviously operated by Datum in Austin, Texas is undergoing remediation forknown subsurface contamination at that facility and adjoining properties. Webelieve that we will incur monitoring costs for years to come in connectionwith this subsurface contamination. Further, we have received a demand fromadjoining landowner and may be subject to claims from other adjoininglandowners, in addition to claims for remediation, and the amount of thesecosts and the extent of our exposure to these demands and claims cannot bedetermined at this time. The determination of the existence and cost of anyadditional contamination could involve costly and time-consuming negotiationsand litigation. Remediation activities and subsurface contamination may requireus to incur additional unreimbursed costs and could harm on-site operations andthe future use and value of the property. The remediation efforts, the propertyowner’s claims and any related governmental action may expose us to materialliability and could significantly harm 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 financial responsibilityfor the collection, recycling, treatment and disposal of both new product sold,and product already sold prior to the WEEE Directive’s enforcement date, tocustomers 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 may needto 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. In addition, weare aware of similar legislation which may be enacted in other countries, suchas Japan and China, and possible new federal and state legislation in theUnited States, the cumulative impact of which could significantly increase ouroperating costs and adversely affect our operating results.

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***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 with applicablegovernment regulations could also result in cessation of our operations orportions of our operations, product recalls or impositions of fines andrestrictions on our ability to carry on or expand our operations. In addition,because many of our products are regulated or sold into regulated industries,we must comply with additional regulations in marketing our products. Ourproducts and operations are also often subject to the rules of industrialstandards bodies, like the International Standards Organization, as well asregulation of other agencies such as the United States Federal CommunicationsCommission. If we fail to adequately address any of these regulations, ourbusiness 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,which are primarily to Western Europe, Latin America, Asia and Canada,accounted for 35% of net revenue during fiscal year 2005, compared to 32% ofnet revenue during fiscal 2004. We anticipate that sales to customers locatedoutside of the United States will continue to be a significant part of our netrevenue for the foreseeable future. Because significant portions of our salesare to customers outside 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;

·       longerpayment cycles;

·       unexpectedchanges in regulatory requirements or tariffs;

·       protectionistlaws and business practices that favor local competition;

·       dependenceon local vendors; and

·       reducedor limited protection of intellectual property rights and political andeconomic 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 

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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 in foreign currency hedgingactivities or derivative arrangements, but may do so in the future to theextent 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 impairment charges in future quarters***

As of June 30, 2005,we had recorded goodwill with a net book value of $49.2 million related toacquisitions of Datum, TrueTime and certain assets of Hewlett Packard Company’sCommunication Synchronization Business. We test for impairment at leastannually and whenever evidence of impairment exists. We performed our annualgoodwill impairment test as of June 30, 2005 and June 30, 2004 anddetermined that goodwill was not impaired. In fiscal 2003, we recorded a $14.7million impairment charge for goodwill. In connection with the discontinuanceof the Trusted Time Division in the fourth quarter of fiscal 2003, we recordedan additional $11.6 million impairment of goodwill. If our future financialperformance or other events indicate that the value of our recorded goodwill isimpaired, we may record additional impairment charges that could have amaterial adverse effect on our reported results.

***Increases in oureffective tax rate may negatively impact our net earnings***

Our effective tax rate isaffected by the percentage of qualified Puerto Rican earnings compared to ourtotal earnings. Most of our Puerto Rican earnings are taxed under Section 936of the United States Internal Revenue Code, which exempts qualified PuertoRican earnings from federal taxes. The Section 936 exemption is subject toa variety of limitations before it expires at the end of fiscal 2006.Historically, we have reduced our effective tax rate using the Section 936exemption. Our effective tax rate may increase in fiscal 2006 as forecastedqualified Puerto Rican earnings are expected to exceed the applicable Section 936limitations. Additionally, the effective tax rate may fluctuate quarterly,depending on the percentage of quarterly Puerto Rican earnings to totalearnings and changes to forecasts of full year Puerto Rican earnings and totalearnings. An increase in our effective tax rate will increase our federalincome taxes, negatively impact our net earnings and may affect cash flow.

***We may be subjectto additional taxes from tax reviews by 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.

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***Investor confidenceand share value may be adversely impacted if our independent auditors areunable to provide us with the attestation of the adequacy of our internalcontrols over financial reporting, as required by Section 404 of theSarbanes-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, 2005, we cannot assure you that we or our independentregistered public accounting firm will not identify a material weakness in ourinternal controls in the future. A material weakness in our internal controlsover financial reporting would require management and our independentregistered public accounting firm to evaluate our internal controls asineffective. If our internal controls over financial reporting are not consideredadequate, we may experience a loss of public confidence, which could have anadverse effect on our business and our stock price.

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

**Interest Rate Exposure**

As of June 30, 2005, we had short-terminvestments of $89.5 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 30,2005, 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, wehad convertible subordinate notes with a fixed rate of 3.25%, which would haveno interest rate risk impact to our business.

**ForeignCurrency Exchange 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 $0.5 million with the United Kingdom and $0.2 million with Germanyat June 30, 2005, a hypothetical 10% adverse change in sterling or Euroagainst United 

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States dollars would notresult in a material foreign exchange loss. Consequently, we do not expect thatreductions in the value of such intercompany balances, or of other accountsdenominated in foreign currencies resulting from even a sudden or significantfluctuation in foreign exchange rates, would have a direct material impact onour 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 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      |       |
| **Fiscal Year 2004**                                            |       |                                                                  |       |        |       |        |       |        |       |      |       |
| Net revenue                                                     |       | $                                                                     | 38,478     |        | $          | 40,953      |       | $           | 43,748     |      | $          | 49,668 |   | $ | 172,847 |   |
| Gross profit                                                    |       | 13,816                                                                |       | 10,605      |       | 17,146      |       | 20,097      |       | 61,664    |       |
| Operating income (loss)                                         |       | (2,941                                                                | )          | (5,878      | )          | 2,390       |       | 2,333       |       | (4,096    | )          |
| Income (loss) from continuing operations before  income taxes   |       | (3,018                                                                | )          | (5,941      | )          | 2,342       |       | 2,244       |       | (4,373    | )          |
| Income (loss) from continuing operations                        |       | (2,256                                                                | )          | (3,867      | )          | 1,750       |       | 2,123       |       | (2,250    | )          |
| Gain (loss) on discontinued operations                          |       | (34                                                                   | )          | 18          |       | (1          | )          | 30          |       | 13        |       |
| Net income (loss)                                               |       | (2,290                                                                | )          | (3,849      | )          | 1,749       |       | 2,153       |       | (2,237    | )          |
| Basic earnings (loss) per share from continuing  operations     |       | (0.05                                                                 | )          | (0.09       | )          | 0.04        |       | 0.05        |       | (0.05     | )          |
| Basic earnings (loss) per share from discontinued  operations   |       | —                                                                |       | —      |       | —      |       | —      |       | —    |       |
| Basic net earnings (loss) per share                             |       | (0.05                                                                 | )          | (0.09       | )          | 0.04        |       | 0.05        |       | (0.05     | )          |
| Diluted earnings (loss) per share from continuing  operations   |       | (0.05                                                                 | )          | (0.09       | )          | 0.04        |       | 0.05        |       | (0.05     | )          |
| Diluted earnings (loss) per share from discontinued  operations |       | —                                                                |       | —      |       | —      |       | —      |       | —    |       |
| Diluted net  earnings (loss) per share                          |       | (0.05                                                                 | )          | (0.09       | )          | 0.04        |       | 0.05        |       | (0.05     | )          |

 

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**SYMMETRICOM, INC.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                                                   | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                          |       |     | 52         |   |   |
| Consolidated  Balance Sheets at June 30, 2005 and 2004                                                                                       |       |     | 53         |   |   |
| Consolidated Statements of Operations for the years  ended June 30, 2005, 2004 and 2003                                                      |       |     | 54         |   |   |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income (Loss) for the years ended June 30, 2005, 2004  and 2003 |       |     | 55         |   |   |
| Consolidated Statements of Cash Flows for the years  ended June 30, 2005, 2004 and 2003                                                      |       |     | 56         |   |   |
| Notes to the Consolidated Financial Statements                                                                                                    |       |     | 57         |   |   |

 

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**REPORTOF INDEPENDENT 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 subsidiaries (the “Company”) as of June 30,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity, and comprehensive income (loss), and cash flows for theeach of the three years in the period ended June 30, 2005. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15(a)(2).These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with the 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, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat 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 Symmetricom, Inc.as of June 30, 2005 and 2004, and the results of their operations andtheir cash flows for each of the three years in the period ended June 30,2005, in 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 informationset forth therein.

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, 2005, based on the criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated September 9,2005 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

DELOITTE & TOUCHE LLPSeptember 9, 2005

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**SYMMETRICOM, INC.CONSOLIDATED BALANCE SHEETS(In thousands)**
| ** **                                                                                                                                                            | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2005**          | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                            |       |              |       |   |   |
| Current assets:                                                                                                                                                       |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                             |       | $                 | 105,635    |   | $ | 34,213 |   |
| Short-term investments                                                                                                                                                |       | 89,514            |       | 13,398 |   |
| Cash and investments                                                                                                                                                  |       | 195,149           |       | 47,611 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $874 and $763                                                                                         |       | 29,049            |       | 28,941 |   |
| Inventories                                                                                                                                                           |       | 26,698            |       | 27,877 |   |
| Prepaids and other current assets                                                                                                                                     |       | 10,827            |       | 9,720 |   |
| Total current assets                                                                                                                                                  |       | 261,723           |       | 114,149 |   |
| Property, plant  and equipment, net                                                                                                                                   |       | 23,063            |       | 27,936 |   |
| Goodwill                                                                                                                                                              |       | 49,248            |       | 49,248 |   |
| Other intangible  assets, net                                                                                                                                         |       | 10,272            |       | 14,665 |   |
| Deferred taxes  and other assets                                                                                                                                      |       | 47,365            |       | 41,092 |   |
| Note receivable  from employee                                                                                                                                        |       | 500               |       | 500 |   |
| Total assets                                                                                                                                                          |       | $                 | 392,171    |   | $ | 247,590 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                        |       |              |       |   |   |
| Current liabilities:                                                                                                                                                  |       |              |       |   |   |
| Accounts payable                                                                                                                                                      |       | $                 | 12,684     |   | $ | 15,372 |   |
| Accrued compensation                                                                                                                                                  |       | 9,062             |       | 9,661 |   |
| Accrued warranty                                                                                                                                                      |       | 3,338             |       | 3,194 |   |
| Other accrued liabilities                                                                                                                                             |       | 12,416            |       | 12,506 |   |
| Current maturities of long-term obligations                                                                                                                           |       | 1,110             |       | 1,128 |   |
| Total current liabilities                                                                                                                                             |       | 38,610            |       | 41,861 |   |
| Long-term  obligations                                                                                                                                                |       | 126,967           |       | 8,827 |   |
| Deferred income  taxes                                                                                                                                                |       | 419               |       | 418 |   |
| Total liabilities                                                                                                                                                     |       | 165,996           |       | 51,106 |   |
| Stockholders’ equity:                                                                                                                                            |       |              |       |   |   |
| Preferred stock, $0.0001 par value; 500 shares  authorized, none issued                                                                                               |       | —            |       | — |   |
| Common stock, $0.0001 par value; 70,000 shares  authorized, 46,836 shares issued and 46,329 outstanding in 2005; 45,475  shares issued and 44,915 outstanding in 2004 |       | 184,292           |       | 174,293 |   |
| Stockholder note receivable                                                                                                                                           |       | —            |       | (555 | ) |
| Accumulated other comprehensive income (loss)                                                                                                                         |       | 100               |       | (1 | ) |
| Deferred stock-based compensation                                                                                                                                     |       | —            |       | (1,120 | ) |
| Retained earnings                                                                                                                                                     |       | 41,783            |       | 23,867 |   |
| Total stockholders’ equity                                                                                                                                       |       | 226,175           |       | 196,484 |   |
| Total liabilities  and stockholders’ equity                                                                                                                      |       | $                 | 392,171    |   | $ | 247,590 |   |

 

See notes to the consolidated financial statements.

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**SYMMETRICOM, INC.CONSOLIDATED STATEMENTSOF OPERATIONS (In thousands, except per share amounts)**
| ** **                                            | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net revenue                                           |       | $                                      | 189,147    |   | $ | 172,847 |   | $ | 132,049 |   |
| Cost of products  and services                        |       | 96,720                                 |       | 101,410 |   | 80,314 |   |
| Amortization of  purchased technology                 |       | 3,899                                  |       | 3,911 |   | 3,104 |   |
| Write-off of  Telmax royalty                          |       | —                                 |       | — |   | 567 |   |
| Integration and  restructuring charges                |       | —                                 |       | 5,862 |   | 1,733 |   |
| Gross profit                                          |       | 88,528                                 |       | 61,664 |   | 46,331 |   |
| Operating expenses:                                   |       |                                   |       |   |   |   |   |
| Research and development                              |       | 16,286                                 |       | 16,772 |   | 21,468 |   |
| Selling, general and administrative                   |       | 52,439                                 |       | 45,825 |   | 46,744 |   |
| Amortization of intangibles                           |       | 613                                    |       | 838 |   | 1,171 |   |
| Integration and restructuring charges                 |       | —                                 |       | 2,325 |   | 6,711 |   |
| Impairment of goodwill                                |       | —                                 |       | — |   | 14,723 |   |
| Acquired in-process research and development          |       | —                                 |       | — |   | 1,561 |   |
| Operating income (loss)                               |       | 19,190                                 |       | (4,096 | ) | (46,047 | ) |
| Gain (loss) on  equity investments, net               |       | 389                                    |       | — |   | (450 | ) |
| Interest income                                       |       | 1,533                                  |       | 308 |   | 625 |   |
| Interest expense                                      |       | (814                                   | )          | (585 | ) | (628 | ) |
| Income (loss) before income taxes                     |       | 20,298                                 |       | (4,373 | ) | (46,500 | ) |
| Income tax  provision (benefit)                       |       | 2,544                                  |       | (2,123 | ) | (12,153 | ) |
| Income (loss) from continuing operations              |       | 17,754                                 |       | (2,250 | ) | (34,347 | ) |
| Gain (loss) from  discontinued operations, net of tax |       | 162                                    |       | 13 |   | (14,970 | ) |
| Net income (loss)                                     |       | $                                      | 17,916     |   | $ | (2,237 | ) | $ | (49,317 | ) |
| Earnings (loss) per  share—basic:                |       |                                   |       |   |   |   |   |
| Earnings (loss) from continuing operations            |       | $                                      | 0.39       |   | $ | (0.05 | ) | $ | (0.96 | ) |
| Earnings (loss) from discontinued operations          |       | —                                 |       | — |   | (0.42 | ) |
| Net earnings (loss)                                   |       | $                                      | 0.39       |   | $ | (0.05 | ) | $ | (1.38 | ) |
| Weighted average  shares outstanding—basic       |       | 45,532                                 |       | 43,691 |   | 35,645 |   |
| Earnings (loss)  per share—diluted:              |       |                                   |       |   |   |   |   |
| Earnings (loss) from continuing operations            |       | $                                      | 0.38       |   | $ | (0.05 | ) | $ | (0.96 | ) |
| Earnings (loss) from discontinued operations          |       | —                                 |       | — |   | (0.42 | ) |
| Net earnings (loss)                                   |       | $                                      | 0.38       |   | $ | (0.05 | ) | $ | (1.38 | ) |
| Weighted average shares  outstanding—diluted     |       | 46,936                                 |       | 43,691 |   | 35,645 |   |

 

See notes to the consolidated financial statements.

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**SYMMETRICOM, INC.CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVEINCOME (LOSS)**

**(In thousands)**
| ** **                                                              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **       | ** ** | ** **        | ** ** | **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, 2002                                          |       |                  | 22,131     |       |       | $                 | 29,441     |                   |       | $                | (555       | )                 |       |              | $          | (118                   | )          |   |   | $ | — |   |   |   | $ | 75,421 |   |   | $ | 104,189 |   |   | $ | (6,893 | ) |   |
| Issuance of common stock:                                               |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisitions of  Datum and TrueTime                                     |       |                  | 20,091     |       |       | 128,849           |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 128,849 |   |   | — |   |   |
| Stock option  exercises, net of shares tendered upon exercise           |       |                  | 157        |       |       | 458               |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 458 |   |   | — |   |   |
| Employee stock  purchase plan                                           |       |                  | 180        |       |       | 515               |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 515 |   |   | — |   |   |
| Restricted stock  issued in exchange of stock options                   |       |                  | 253        |       |       | 1,133             |       |                   | —     |             |       |              | —     |              |       |                   | (1,133     | ) |   |   | — |   |   | — |   |   | — |   |   |
| Repurchase of  common stock                                             |       |                  | (321       | )          |       | (1,202            | )          |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | (1,202 | ) |   | — |   |   |
| Comprehensive income:                                                   |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss from  continuing operations                                        |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | (34,347 | ) |   | (34,347 | ) |   | (34,347 | ) |   |
| Loss from  discontinued operations, net of tax of $2,004                |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | (14,970 | ) |   | (14,970 | ) |   | (14,970 | ) |   |
| Unrealized loss on  short-term investments, net of taxes                |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | (281       | )                 |       |                   | —     |   |   |   | — |   |   | (281 | ) |   | (281 | ) |   |
| Cumulative  adjustments to foreign  currency translation, net of  taxes |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | 221        |              |       |                   | —     |   |   |   | — |   |   | 221 |   |   | 221 |   |   |
| 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:                                                   |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain 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 |   |   |

 

See notes to the consolidated financial statements.

55

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**SYMMETRICOM, INC.CONSOLIDATED STATEMENTSOF CASH FLOWS(In thousands)**
| ** **                                                                                            | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating  activities:                                                                |       |                                   |       |   |   |   |   |
| Net Income (loss)                                                                                     |       | $                                      | 17,916     |   | $ | (2,237 | ) | $ | (49,317 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used for) operating  activities: |       |                                   |       |   |   |   |   |
| Impairment of goodwill                                                                                |       | —                                 |       | — |   | 14,723 |   |
| Acquired in-process research and development                                                          |       | —                                 |       | — |   | 1,561 |   |
| (Gain) loss from disposal of discontinued operations                                                  |       | (162                                   | )          | — |   | 12,704 |   |
| Depreciation and amortization                                                                         |       | 11,303                                 |       | 11,646 |   | 11,983 |   |
| Deferred income taxes                                                                                 |       | (3,368                                 | )          | (6,540 | ) | (12,099 | ) |
| (Gain) loss on sale of equity investments                                                             |       | (389                                   | )          | — |   | 450 |   |
| Loss on sale of fixed assets                                                                          |       | 202                                    |       | — |   | — |   |
| Gain on post-retirement benefit obligation                                                            |       | (118                                   | )          | — |   | — |   |
| Amortization of deferred stock-based compensation                                                     |       | 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                                                                                   |       | (108                                   | )          | (5,165 | ) | (1,877 | ) |
| Inventories                                                                                           |       | 1,179                                  |       | 1,165 |   | 9,180 |   |
| Prepaids and other assets                                                                             |       | (377                                   | )          | 590 |   | 2,591 |   |
| Accounts payable                                                                                      |       | (2,688                                 | )          | 3,126 |   | (1,166 | ) |
| Accrued compensation                                                                                  |       | (599                                   | )          | (2,530 | ) | 984 |   |
| Other accrued liabilities                                                                             |       | (555                                   | )          | 1,409 |   | (1,388 | ) |
| Net cash provided by (used for) operating activities                                                  |       | 27,177                                 |       | 6,674 |   | (11,671 | ) |
| Cash flows from investing  activities:                                                                |       |                                   |       |   |   |   |   |
| Change in restricted cash                                                                             |       | —                                 |       | 3,396 |   | (2,907 | ) |
| Acquisition and related costs, net of cash acquired                                                   |       | —                                 |       | — |   | (2,730 | ) |
| Purchases of short-term investments                                                                   |       | (83,478                                | )          | (19,565 | ) | (305 | ) |
| Maturities of short-term investments                                                                  |       | 7,460                                  |       | 7,167 |   | 141 |   |
| Proceeds from sale of equity investments                                                              |       | —                                 |       | — |   | 275 |   |
| Purchases of plant and equipment                                                                      |       | (3,074                                 | )          | (3,897 | ) | (1,571 | ) |
| Proceeds from sale of assets                                                                          |       | 1,585                                  |       | — |   | — |   |
| Net cash used for investing activities                                                                |       | (77,507                                | )          | (12,899 | ) | (7,097 | ) |
| Cash  flows from financing activities:                                                                |       |                                   |       |   |   |   |   |
| Repayment of long-term obligations                                                                    |       | (1,148                                 | )          | (1,660 | ) | (1,461 | ) |
| Proceeds from issuance of common stock                                                                |       | 8,011                                  |       | 9,902 |   | 973 |   |
| Proceeds from repayment of employee note                                                              |       | 555                                    |       | — |   | — |   |
| Proceeds from convertible notes                                                                       |       | 116,151                                |       | — |   | — |   |
| Repurchase of common stock                                                                            |       | (1,833                                 | )          | — |   | (1,202 | ) |
| Net cash provided by (used for) financing activities                                                  |       | 121,736                                |       | 8,242 |   | (1,690 | ) |
| Effect of exchange rate changes in cash                                                               |       | 16                                     |       | (88 | ) | 221 |   |
| Net increase (decrease) in cash and cash equivalents                                                  |       | 71,422                                 |       | 1,929 |   | (20,237 | ) |
| Cash and cash equivalents at beginning of year                                                        |       | 34,213                                 |       | 32,284 |   | 52,521 |   |
| Cash and cash equivalents at end of year                                                              |       | $                                      | 105,635    |   | $ | 34,213 |   | $ | 32,284 |   |
| Non-cash investing and  financing activities:                                                         |       |                                   |       |   |   |   |   |
| Unrealized loss (gain) on securities, net                                                             |       | $                                      | 84         |   | $ | 265 |   | $ | (281 | ) |
| Deferred taxes on unrealized loss (gain)                                                              |       | —                                 |       | — |   | (63 | ) |
| Issuance of common stock for Datum and TrueTime  acquisitions                                         |       | —                                 |       | — |   | 128,849 |   |
| Restricted Stocks                                                                                     |       | 120                                    |       | — |   | — |   |
| Cash payments for:                                                                                    |       |                                   |       |   |   |   |   |
| Interest                                                                                              |       | $                                      | 544        |   | $ | 585 |   | $ | 629 |   |
| Income taxes                                                                                          |       | 1,427                                  |       | 367 |   | 447 |   |

 

See notes to the consolidated financial statements.

56

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

**NoteA—Summary of Significant 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. Our 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. Ourproducts 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 our wholly ownedsubsidiaries. All significant intercompany accounts and transactions areeliminated.

*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 2005 ended on July 3, 2005. All references to years refer to ourfiscal years. Fiscal years 2005, 2004 and 2003 consisted of 53, 52 and 52weeks, 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 purchased with a remaining maturity of three months orless 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.

57

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

The following tablesummarizes Symmetricom’s available-for-sale securities recorded as cash andcash equivalents or short-term investments:
| ** **                                         | ** ** | ** **              | ** ** | **Gross Unrealized** | ** ** | ** **          | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                                         | ** ** | **Amortized Cost** | ** ** | **Gains (losses)**   | ** ** | **Fair Value** | ** ** |
| ** **                                         | ** ** | ** **              | ** ** | **(In thousands)**   | ** ** | ** **          | ** ** |
| **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 |   |
| **June 30, 2004**                             |       |                    |       |                      |       |                |       |   |   |   |   |
| Commercial paper                                   |       |                    | $          | 27,655                    |       |                |       | $ | — |   |   | $ | 27,655 |   |
| Less amounts  classified as cash equivalents  |       |                    | (15,568    | )                         |       |                | —     |   |   | (15,568 | ) |
| Deferred  compensation plan assets                 |       |                    | 1,046      |                      |       |                | 265        |   |   | 1,311 |   |
| Total short term  investments                      |       |                    | $          | 13,133                    |       |                |       | $ | 265 |   |   | $ | 13,398 |   |

 

*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 bond 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 which would impact their ability topay.

58

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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,**       | ** ** |
|-----------------|------------|-------------------------|------------|
| ** **      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
| Raw materials   |       | $                       | 12,207     |   | $ | 14,985 |   |
| Work-in-process |       | 9,089                   |       | 9,486 |   |
| Finished goods  |       | 5,402                   |       | 3,406 |   |
| Inventories     |       | $                       | 26,698     |   | $ | 27,877 |   |

 

*Property, Plant andEquipment, Net*

Property, plant and equipment are stated at cost.Depreciation and amortization are computed using the straight-line method basedon the estimated useful lives of the assets (three to twelve years) or thelease term, if shorter.

Property,plant and equipment consists of the following:
| ** **                                | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(In thousands)**                | ** ** |
| Property, plant  and equipment, net:      |       |                                   |       |   |   |
| Land                                      |       | $                                      | 200        |   | $ | 200 |   |
| Buildings and improvements                |       | 14,551                                 |       | 14,492 |   |
| Austin, Texas facility held for sale      |       | —                                 |       | 1,581 |   |
| Machinery and equipment                   |       | 34,713                                 |       | 35,523 |   |
| Computer software                         |       | 7,441                                  |       | 7,284 |   |
| Leasehold improvements                    |       | 10,025                                 |       | 9,819 |   |
|                                      |       | 66,930                                 |       | 68,899 |   |
| Accumulated depreciation and amortization |       | (43,867                                | )          | (40,963 | ) |
|                                      |       | $                                      | 23,063     |   | $ | 27,936 |   |

 

Building and improvements includes $9,007,000 of costscapitalized under a capital lease for our facility in San Jose, California,which was completed in June 1997. As of June 30, 2005 and 2004accumulated amortization for this facility totaled $6,089,000 and $5,328,000,respectively.

As of June 30, 2005,we had no machinery and equipment under capital lease. During fiscal 2004,machinery and equipment included $486,000 of cost capitalized under a capitallease with accumulated depreciation of $329,000.

59

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

*Goodwill*

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. Suchallocations require management to make significant estimations and assumptions,especially with respect to intangible assets.

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.

In June 2001, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141,“Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.” SFAS No. 141 requires that all business combinations initiatedafter June 30, 2001 be accounted for under the purchase method andaddresses the initial recognition and measurement of goodwill and otherintangible assets acquired in a business combination.

The provisions of SFAS No. 142also require an annual goodwill impairment test or more frequently ifimpairment indicators arise. In testing for a potential impairment of goodwill,the provisions of SFAS No. 142 require the application of a fair valuebased test at the reporting unit level. The first step of the impairment testprescribed by SFAS No. 142 requires an estimate of the fair value of eachunit. If the estimated fair value of any unit is less than the book value, SFASNo. 142 requires an estimate of the fair value of all identifiable assetsand liabilities of the unit in a manner similar to a purchase price allocationfor an acquired business. This estimate requires valuations of certaininternally generated and unrecognized intangible assets such as in-processresearch and development and developed technology. Potential goodwillimpairment is measured based upon this two-step process. We performed ourannual goodwill impairment test as of June 30, 2005 and June 30, 2004and no impairment losses were recorded based on these evaluations. In fiscal2003, we recorded $14.7 million of goodwill impairment, $11.6 million of whichrelated to the discontinuance of the Trusted Time Division.

*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 thecarrying value of the asset. Impairment is measured as the amount by which thecarrying amount 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.

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

Accumulated othercomprehensive income (loss), consists of the following:
| ** **                                              | ** ** | **Year ended June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Foreign currency  translation adjustments, net of taxes |       | $                                      | 150        |   | $ | 133 |   | $ | 221 |   |
| Unrealized loss  on investments, net of taxes           |       | (50                                    | )          | (134 | ) | (399 | ) |
| Total accumulated other  comprehensive income (loss)    |       | $                                      | 100        |   | $ | (1 | ) | $ | (178 | ) |

 

*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.

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.

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

*Foreign CurrencyTranslation*

The functional currencies of our internationalsubsidiaries in the United Kingdom, Puerto Rico, and Hong Kong are the U.S.dollar, while Germany is the Euro.

For our subsidiary in the United Kingdom, foreigncurrency denominated assets and liabilities are translated at the year-endexchange rates, except for inventories, prepaid expenses, and property and equipment,which are translated at historical exchange rates. Statements of operations aretranslated at the average exchange rates during the year except for thoseexpenses related to the balance sheet amounts, which are translated usinghistorical exchange rates. Net gains (losses) from these foreign exchangetransactions have not been material to our operating results for any of theperiods 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.

*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 a fee is not reasonably assured,we recognize the revenue at the time that collection becomes reasonablyassured, which is generally upon the receipt of cash. We commonly havetransactions that involve sales of both product and services to our customers.Product revenue is generated from the sale of synchronization and timingequipment with embedded software that is essential to product functionality. Weaccount for these transactions in accordance with the rules applicable tosoftware revenue recognition. Service revenue is recognized as the services areperformed provided collection of the related receivable is probable. Our salesto distributors are made under agreements allowing for returns or credits undercertain circumstances. Accordingly, we defer an estimate of returns fromdistributors based on a historical average of distributor returns. We recordcommission expense when orders are shipped, at which time the commission isboth earned and payable.

Revenue from contracts that require development andmanufacture in accordance with customer specifications and have a lengthydevelopment period may be categorized into two types: firm fixed price andcost-plus reimbursement. Revenue is recognized under the fixed price contractsusing the percentage of completion method, (cost-to-cost basis) principallybased upon the costs incurred relative to the total estimated costs atcompletion on the individual contracts. Any anticipated losses on contracts arecharged to operations as soon as they are determinable. Revenue recognizedunder cost plus contracts is recognized on the basis of direct and indirectcosts incurred plus a negotiated profit calculated as a percentage of costs oras performance based award fee. Revenue from long-term contracts is reviewedperiodically, with adjustments recorded in the period in which the revisionsare made. A contract is determined to be substantially complete when thephysical deliverables are completed, shipped and accepted. Unbilled receivablestotaled $1.6 million as of June 30, 2005, of which $1.1 million isexpected to 

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

be collected in fiscal2006 and the remainder in subsequent years. Any anticipated losses on contractsare charged to operations as soon as they are determinable.

*Stock-BasedCompensation*

Weaccount for employee stock-based compensation using the intrinsic-value-basedmethod of accounting as defined under Accounting Principles Board Opinion No. 25(APB 25), “Accounting for Stock Issued to Employees,” and its relatedinterpretations. Accordingly, we recognize no compensation expense in ourconsolidated statements of operations with respect to options awarded to ouremployees with exercise prices greater than or equal to the fair value of theunderlying common stock at the date of grant. However, we recognizecompensation expense in our consolidated statements of operations with respectto restricted stock awarded to our employees. The following table illustratesthe effect on net income (loss) and earnings (loss) per share if we had appliedthe fair value recognition provisions of SFAS No. 123 “Accounting forStock-Based Compensation,” to stock-based employee compensation.
| ** **                                                                                                                                                             | ** ** | **Year ended June 30,**                            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2005**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                             | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| Net income  (loss), as reported                                                                                                                                        |       | $                                                                 | 17,916     |   | $ | (2,237 | ) | $ | (49,317 | ) |
| 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 | ) | (1,244 | ) |
| Pro forma net  income (loss)                                                                                                                                           |       | $                                                                 | 12,405     |   | $ | (4,213 | ) | $ | (50,561 | ) |
| Earnings (loss)  per share—basic:                                                                                                                                 |       |                                                              |       |   |   |   |   |
| As reported                                                                                                                                                            |       | $                                                                 | 0.39       |   | $ | (0.05 | ) | $ | (1.38 | ) |
| Pro forma                                                                                                                                                              |       | $                                                                 | 0.27       |   | $ | (0.10 | ) | $ | (1.42 | ) |
| Earnings (loss)  per share—diluted:                                                                                                                               |       |                                                              |       |   |   |   |   |
| As reported                                                                                                                                                            |       | $                                                                 | 0.38       |   | $ | (0.05 | ) | $ | (1.38 | ) |
| Pro forma                                                                                                                                                              |       | $                                                                 | 0.26       |   | $ | (0.10 | ) | $ | (1.42 | ) |

 

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

*Net Income (Loss) PerShare*

Basicearning (loss) per share is computed by dividing net income (loss) by theweighted average number of common shares outstanding during the period. Dilutedincome (loss) per share is calculated by dividing net income (loss) by theweighted average number of common shares outstanding and common equivalentshares from dilutive stock options, warrants, and restricted stock using thetreasury method, except when antidilutive.
| ** **                                                                   | ** ** | **Year ended June 30,**                            | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                   | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| Numerator:                                                                   | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) from continuing operations                                 |       | $                                                                 | 17,754     |   | $ | (2,250 | ) | $ | (34,347 | ) |
| Gain (loss) from discontinued operations                                     |       | 162                                                               |       | 13 |   | (14,970 | ) |
| Net income (loss)                                                            |       | $                                                                 | 17,916     |   | $ | (2,237 | ) | $ | (49,317 | ) |
| Shares  (Denominator):                                                       |       |                                                              |       |   |   |   |   |
| Weighted average common shares outstanding                                   |       | 45,654                                                            |       | 43,691 |   | 35,645 |   |
| Weighted average common shares outstanding subject  to repurchase            |       | (122                                                              | )          | — |   | — |   |
| Weighted average shares outstanding—basic                               |       | 45,532                                                            |       | 43,691 |   | 35,645 |   |
| Weighted average dilutive share equivalents from  stock options and warrants |       | 1,282                                                             |       | — |   | — |   |
| Weighted average common shares dilutive subject to  repurchase               |       | 122                                                               |       | — |   | — |   |
| Weighted average shares outstanding—diluted                             |       | 46,936                                                            |       | 43,691 |   | 35,645 |   |
| Net earnings (loss) per share—basic                                     |       | $                                                                 | 0.39       |   | $ | (0.05 | ) | $ | (1.38 | ) |
| Net earnings  (loss) per share—diluted                                  |       | $                                                                 | 0.38       |   | $ | (0.05 | ) | $ | (1.38 | ) |

 

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,**                            | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                    | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| Stock  options & warrants                                                            |       | 1,861                                                             |       | 5,789 |   | 5,624 |   |
| Common shares  subject to repurchase                                                          |       | —                                                            |       | 267 |   | — |   |
| Total shares of common  stock excluded from diluted net earnings (loss) per share calculation |       | 1,861                                                             |       | 6,056 |   | 5,624 |   |

 

We account for ourcontingent convertible notes in accordance with Emerging Issues Task Force (“EITF”)04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings PerShare,” which requires us to include the dilutive effect of the shares of ourcommon stock issuable upon conversion of the outstanding convertible notes inour diluted earnings per share calculation regardless of whether the marketprice trigger or other contingent conversion feature has been met. Because ourNotes include a mandatory cash settlement feature for the principal payment, weapply the treasury stock method. This 

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

methodresults in incremental dilutive shares when the average fair value of ourcommon stock for a reporting period exceeds the initial conversion price pershare of $12.49. However, because our share price did not exceed $12.49, noshares associated with the contingent convertible notes were included in ourdiluted earnings per share as of June 30, 2005.

*Recent AccountingPronouncements*

The FASB issued Interpretation No. 46, or FIN 46,“*Consolidation of Variable InterestEntities,*” in January 2003, and a revised interpretation of FIN46, or FIN 46R, in December 2003. FIN 46 requires certain variableinterest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. The adoption of FIN 46R in the second quarter offiscal year 2004 did not have an impact on our financial position, results ofoperations or cash flows.

In December 2003, the Securities ExchangeCommission, or the SEC, issued Staff Accounting Bulletin No. 104, *Revenue Recognition,* or SAB 104, whichcodifies, revises and rescinds certain sections of SAB 101, “*Revenue Recognition in Financial Statements*,”in order to make this interpretive guidance consistent with currentauthoritative accounting and auditing guidance and SEC rules andregulations. The adoption did not have a material effect on our operatingresults or financial condition.

In March 2004, the EITF reached a final consensuson Issue 03-01, “*The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments*,”to provide additional guidance in determining whether investment securitieshave an impairment, which should be considered, other-than-temporary. Theadoption of Issue 03-01 did not have an effect on our operating results orfinancial condition.

In December 2004, the FASB issued SFAS No. 123(revised 2004),*“Share-Based Payment”*(FAS 123R) that addresses the accounting for share-based payment transactionsin which an enterprise receives employee services in exchange for either equityinstruments of the enterprise or liabilities that are based on the fair valueof the enterprise’s equity instruments or that may be settled by the issuanceof such equity instruments. The statement eliminates the ability to account forshare-based compensation transactions using the intrinsic value method asprescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accountingfor Stock Issued to Employees,” and generally requires that such transactionsbe accounted for using a fair-value-based method and recognized as expenses inour consolidated statement of income. The statement requires companies toassess the most appropriate model to calculate the value of the options. Wecurrently use the Black-Scholes option pricing model to value options and arecurrently assessing which model we may use in the future under the statementand may deem an alternative model to be the most appropriate. The use of adifferent model to value options may result in a different fair value than theuse of the Black-Scholes option pricing model. In addition, there are a numberof other requirements under the new standard that will result in differingaccounting treatment than currently required. These differences include, butare not limited to, the accounting for the tax benefit on employee stockoptions and for stock issued under our employee stock purchase plan. Inaddition to the appropriate fair value model to be used for valuing share-basedpayments, we will also be required to determine the transition method to beused at date of adoption. The allowed transition methods include prospective andretroactive adoption methods. Under the retroactive methods, prior periods maybe restated either as of the beginning of the year of adoption or for allperiods presented. The prospective method requires that 

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

compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of FAS 123R, while the retroactive methodswould record compensation expense for all unvested stock options and restrictedstock beginning with the first period restated. The effective date of the newstandard for our consolidated financial statements is the first quarter offiscal 2006, which begins on July 4, 2005.

Upon adoption, this statement will have a significantimpact on our consolidated financial statements because we will be required toexpense the fair value of our stock option grants and stock purchases under ouremployee stock purchase plan rather than disclose the impact on ourconsolidated net income within our footnotes as is our current practice (see NoteA of the Notes to Consolidated Financial Statements contained herein). Theamounts disclosed within our footnotes are not necessarily indicative of theamounts that will be expensed upon the adoption of FAS 123R. Compensationexpense calculated under FAS 123R may differ from amounts currently disclosedwithin our footnotes based on changes in the fair value of our common stock,changes in the number of options granted or the terms of such options, thetreatment of tax benefits and changes in interest rates or other factors. Inaddition, upon adoption of FAS 123R we may choose to use a different valuationmodel to value the compensation expense associated with employee stock options.

In December 2004, the FASB issued FinancialAccounting Standard No.151, “*Inventory Cost,an amendment of ARB No. 43*, *Chapter4*.” FAS 151clarifies the accounting for inventory when there areabnormal amounts of idle facility expense, freight, handling cost, and wastedmaterial. Under existing GAAP, items such as idle facility expense, excessivewasted material (spoilage), double freight, and re-handling cost may be “soabnormal” as to require treatment as current period charges rather thanrecorded as adjustment to the value of the inventory. FAS 151 requires thatthose items be recognized as current-period charges regardless of whether theymeet the criterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the cost of conversion be based onthe normal capacity of the production facilities. The provision of thisStatement will be effective for inventory cost incurred after June 30,2005. The adoption of FAS 151 is not expected to have a material effect on ourfinancial position or result of operations.

In December 2004, the FASB staff issued FSP FAS109-1, “*Application of FASB Statement No. 109*,*Accounting for Income Taxes*, “ tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004” (the “FSP”) to provide guidance on the applicationof Statement 109 to the provision within the American Jobs Creation Act of 2004(the “Act”) that provides tax relief to U.S. domestic manufacturers. The FSPstates that the manufacturer’s deduction provided for under the Act should beaccounted for as a special deduction in accordance with Statement 109 and notas a tax rate reduction. A special deduction is accounted for by recording thebenefit of the deduction in the year in which it can be taken in the company’stax return, rather than by adjusting deferred tax assets and liabilities in theperiod of the Act’s enactment (which would have been done if the deduction onqualified production activities were treated as a change in enacted tax rates).The FSP was effective upon issuance. The adoption of the FSP did not have amaterial impact on our financial position or results of operations. We arecurrently evaluating the future effects of the FSP.

In December 2004, the FASB issued Statement ofAccounting Standards (SFAS) No. 153, “*Exchangesof Nonmonetary Assets—An Amendment of APB Opinion No. 29*.” SFASNo. 153 is based on the principle that nonmonetary asset exchanges shouldbe recorded and measured at the fair value of the assets exchanged, withcertain exceptions. This standard requires exchanges of productive assets to beaccounted 

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

for at fair value, ratherthan at carryover basis, unless (1) neither the asset received nor theasset surrendered has a fair value that is determinable within reasonablelimits or (2) the transactions lack commercial substance. SFAS No. 153is effective for any nonmonetary asset exchanges occurring after June 30,2005. Adoption of SFAS No. 153 is not expected to have a material impacton our consolidated financial position, results of operations or cash flows.

In May 2005, the FASBissued SFAS No. 154, “*AccountingChanges and Error Corrections*.” FASB Statement of AccountingStandards (SFAS) No. 154 establishes new standards on accounting forchanges in accounting principles. Pursuant to the new rules, all such changesmust be accounted for by retrospective application to the financial statementsof prior periods unless it is impracticable to do so. The Statement iseffective for accounting changes and error corrections made in fiscal yearsbeginning after December 15, 2005, with early adoption permitted forchanges and corrections made in years beginning after May 2005. Adoptionof SFAS No. 154 is not expected to have a material impact on ourconsolidated financial position, results of operations or cash flows.

**Note B—Acquisitions**

*Acquisition ofAgilent’s cesium product line assets*

On June 24, 2005, we entered into a definitiveagreement with Agilent Technologies, Inc. to purchase its Frequency andTime Standards instrumentation product line, including the 5071A cesium primaryfrequency standard. This acquisition is expected to enhance Symmetricom’sposition in the area of cesium standards and to further Symmetricom’sleadership in generating high-precision frequency and timing referencesincluding rubidium, cesium and hydrogen masers. This transaction was to acquireonly certain assets of Agilent Technologies for a cost of approximately $8.0million. The acquisition of the assets was accounted for as a purchase andclosed on August 1, 2005.

During the second quarterof fiscal 2003, we acquired Datum Inc. (“Datum”) and TrueTime, Inc. (“TrueTime”)to add complementary products and increase our customer base, among otherreasons. In fiscal 2003, we also acquired certain assets from NetMonitor, Ltd.(“NetMonitor”), a wholly owned subsidiary of Kestrel Solutions, Inc. (“Kestrel”).

*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 purchase approximately2.3 million shares of our common stock with a fair value of $13.1 million andconverted Datum warrants into warrants to purchase 486,754 shares of our commonstock with an exercise price of $4.135 per share and a fair value of $1.8million. In addition, we incurred direct acquisition costs of approximately$6.6 million.

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

The purchase price wasallocated to Datum’s assets and liabilities as follows (in thousands):
| 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.

*Acquisition ofTrueTime*

On October 4, 2002, we completed our acquisitionof TrueTime. The acquisition was accomplished pursuant to an Agreement and Planof Merger, dated as of March 27, 2002 and amended as of June 26, 2002and was accounted for as a purchase. As a result of the merger, TrueTime becamea wholly owned subsidiary of Symmetricom. We issued approximately 2.6 millionshares of our common stock with a fair value of $16.3 million and $5.0 millionin cash, paid $34,000 to cancel TrueTime’s options and converted TrueTime’swarrants into warrants to purchase 87,394 shares of our common stock with anexercise price of $12.59 per share with a fair value of $235,000. In addition,we incurred direct acquisition costs of approximately $1.2 million.

The purchaseprice was allocated to TrueTime’s assets and liabilities as follows (inthousands):
| Cash and cash  equivalents           |   | $      | 7,823  |   |
|--------------------------------------|--------|--------|--------|--------|
| Property, plant  and equipment       |   | 3,321  |   |
| Other tangible  assets               |   | 9,606  |   |
| Existing  technology                 |   | 2,760  |   |
| In-process  research and development |   | 405    |   |
| Goodwill                             |   | 3,274  |   |
| Assumed  liabilities                 |   | (4,444 | )      |
| Total purchase  price                |   | $      | 22,745 |   |

 

*Acquisition ofNetMonitor*

On October 15, 2002,we acquired certain assets from NetMonitor. The acquisition was accounted foras an asset purchase. We paid $230,000 in cash for the acquired assets andincurred direct acquisition costs 

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

ofapproximately $30,000. The net purchase price was allocated to tangible assetsof $40,000 and existing technology of $220,000.

**Note C—DiscontinuedOperations**

In June 2003, we discontinued the operation ofthe Trusted Time Division as part of our post-acquisition consolidationprocess. The division was acquired as part of the acquisition of Datum in October 2002.The division has been accounted for as a discontinued operation and,accordingly, the results of operations have been excluded from continuingoperations in the consolidated statements of operations.

During fiscal 2005 and 2004, we recognized gains of$162,000 and $13,000, respectively, for final payment for sale of software,related to the Trusted Time Division which was discontinued during fiscal 2003.

During fiscal 2003, werecognized a $15.0 million loss, or $0.42 per share, net of taxes, of which$12.7 million was due to the loss on disposal, and $2.3 million wereoperational losses. The loss from disposal consisted of an $11.6 milliongoodwill impairment charge and a $1.1 million impairment charge for intangibleassets.

**Note D—Other Accrued Liabilities**

Otheraccrued liabilities consists of the following:
| ** **                  | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(In thousands)**                | ** ** |
| Other accrued  liabilities: |       |                                   |       |   |   |
| Income taxes payable        |       | $                                      | 4,408      |   | $ | 2,783 |   |
| Deferred revenue            |       | 2,847                                  |       | 2,135 |   |
| Accrued lease loss          |       | 667                                    |       | 2,275 |   |
| Accrued expenses            |       | 4,494                                  |       | 5,313 |   |
| Total                       |       | $                                      | 12,416     |   | $ | 12,506 |   |

 

**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 5.1% 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.

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

Thefollowing sets forth the Company’s post-retirement program’s status reconciledwith amounts reported in the consolidated balance sheet (in thousands):
| ** **                                                         | ** ** | **Year ended Jun**e 30, | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**                | ** ** |
| Beginning balance  accumulated post-retirement benefit obligations |       | $                                      | 555        |   | $ | 559 |   |
| Service cost                                                       |       | —                                 |       | — |   |
| Interest cost                                                      |       | 28                                     |       | 34 |   |
| Actuarial gain                                                     |       | (123                                   | )          | 25 |   |
| Benefit payments                                                   |       | (45                                    | )          | (63 | ) |
| Ending balance  accumulated postretirement benefit obligations     |       | $                                      | 415        |   | $ | 555 |   |

 

Netperiodic post-retirement benefit cost includes the following components (inthousands):
| Service cost                          |   | $  | — |   | $      | — |   |
|---------------------------------------|--------|----|--------|--------|--------|--------|--------|
| Interest cost                         |   | 28 |   | 34     |   |
| Net periodic  post-retirement expense |   | $  | 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 the years are as follows:
| ** **                           | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In thousands)**                | ** ** |
| Beginning balance                    |       | $                                      | 3,194      |   | $ | 4,021 |   |
| Provision for  warranty for the year |       | 2,546                                  |       | 2,059 |   |
| Adjustment for  expired warranties   |       | —                                 |       | (23 | ) |
| Less: Actual  warranty costs         |       | (2,402                                 | )          | (2,863 | ) |
| Ending balance                       |       | $                                      | 3,338      |   | $ | 3,194 |   |

 

**Note G—Lease Commitments**

Starting in 1997, we leased a facility in San Jose,California under which the land and building were accounted for as an operatinglease and a capital lease, respectively. This lease expires in April 2009.A section of the facility has been sublet and accounted for as an operatinglease. This sublease expires in March 2007. As of June 30, 2005, theminimum future sublease payments to be received were $512,000.

During fiscal 2001, we leased a facility in Aguadilla,Puerto Rico. We have since expanded the existing building and have consolidatedmost of our manufacturing operations at this facility. The lease on thisbuilding expires in 2016. We account for the lease as an operating lease; anyimprovements to the leased property are capitalized and classified as leaseholdimprovements.

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

During fiscal 2003, we assumed a capital lease andseveral operating leases from the acquisition of TrueTime. The capital lease isfor certain equipment located in a facility in Santa Rosa, California. Thelease of the facility is accounted for as an operating lease with an expirationdate in December 2015. Another facility in Santa Rosa has been sublet andaccounted for as an operating lease. This sublease expires in November 2008.As of June 30, 2005, the minimum future sublease payments to be receivedwere $2.4 million.

During the same fiscal 2003, we assumed severaloperating leases from the acquisition of Datum. Two facilities are located inIrvine, California. Both facilities had been vacant since January 2004 andMay 2003, and expired at the end of July 2005. The operating leasefor the facility in Hofolding, Germany is also for manufacturing and expires inJanuary 2009.

Lease loss liabilities were created as a result ofdiscontinuing operations and consolidations. As of June 30, 2005, theaccrued lease loss liabilities were $946,000.

In addition, we leasecertain other facilities and equipment under operating lease agreements. Rentalexpense charged to operations was $1,372,000 in 2005, $1,905,000 in 2004 and$1,461,000 in 2003. Future minimum lease payments, net of sublease income at June 30,2005 are as follows:
| ** **                                                    | ** ** | **Capital Lease**  | ** ** | **Operating Lease** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
| **For the  years:**                                           |       |                    |       |                     |       |   |   |   |   |
| 2006                                                          |       |                    | $          | 1,412                    |       |   |   | $ | 2,447 |   |   |
| 2007                                                          |       |                    | 1,492      |                     |       |   | 2,091 |   |   |
| 2008                                                          |       |                    | 1,576      |                     |       |   | 2,243 |   |   |
| 2009                                                          |       |                    | 1,325      |                     |       |   | 2,026 |   |   |
| 2010                                                          |       |                    | —     |                     |       |   | 1,393 |   |   |
| Thereafter                                                    |       |                    | —     |                     |       |   | 10,513 |   |   |
| Total minimum lease payments                                  |       |                    | 5,805      |                     |       |   | $ | 20,713 |   |   |
| Amount  representing interest (weighted average rate of 8.5%) |       |                    | (852       | )                        |       |   |   |   |   |
| Present value of  total minimum lease payments                |       |                    | 4,953      |                     |       |   |   |   |   |
| Current portion                                               |       |                    | (1,040     | )                        |       |   |   |   |   |
| Capital lease  obligation, net of current portion             |       |                    | $          | 3,913                    |       |   |   |   |   |   |

 

**NoteH—Goodwill and Intangible Assets**

Thechanges in the carrying value of goodwill for the years ended June 30,2005 and 2004 are as follows for the different segments of Symmetricom (seeNote B):
| ** **                         | ** ** | ** **              | ** ** | ** ** | ** ** | **Timing, Test** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-------------------------|------------|------------|------------|-----------------------|------------|------------|------------|
| ** **                         | ** ** | ** **              | ** ** | ** ** | ** ** | **and**               | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Wireline**            | ** ** | **OEM**    | ** ** | **Measurement**       | ** ** | **Total**  | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** |
| Balances as of June  30, 2003      |       | $                       | 28,175     |       | $          | 7,245                 |       |       | $          | 14,780 |   |   | $ | 50,200 |   |
| Adjustments                        |       | (258                    | )          | (282       | )          |                  | (412       | )          |       | (952 | ) |
| 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 |   |

 

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

Other intangible assetsare recorded at cost, less accumulated amortization. Other intangible assets asof June 30, 2005 and 2004 consist of:
| ** **                         | ** ** | **Gross**                | ** ** | **Accumulated**  | ** ** | **Net**                    | ** ** |
|------------------------------------|------------|--------------------------|------------|------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Carrying Amount** | ** ** | **Amortization** | ** ** | **Intangible Assets** | ** ** |
| ** **                         | ** ** | **(in thousands)**  | ** ** |
| Purchased  technology              |       |                     | $          | 23,573           |       |                       |       | $ | 10,424 |   |   |   | $ | 13,149 |   |   |
| Customer lists,  trademarks, other |       |                     | 3,688      |             |       |                       | 2,172      |   |   |   | 1,516 |   |   |
| Total as of June 30, 2004     |       |                     | $          | 27,261           |       |                       |       | $ | 12,596 |   |   |   | $ | 14,665 |   |   |
| Purchased technology               |       |                     | $          | 23,768           |       |                       |       | $ | 14,557 |   |   |   | $ | 9,211 |   |   |
| Customer lists,  trademarks, other |       |                     | 3,587      |             |       |                       | 2,526      |   |   |   | 1,061 |   |   |
| Total as of  June 30, 2005    |       |                     | $          | 27,355           |       |                       |       | $ | 17,083 |   |   |   | $ | 10,272 |   |   |

 

Intangible asset amortization expense for the yearsended June 30, 2005, June 30, 2004 and June 30, 2003 wasapproximately $4.5 million, $4.7 million and $4.3 million, respectively.

Theestimated future amortization expense is as follows:
| **Fiscal year:** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|-----------------------|------------|------------|------------|-------------------------|------------|
| 2006                  |       |       | $          | 4,101                   |       |   |
| 2007                  |       |       | 2,545      |                    |       |
| 2008                  |       |       | 1,344      |                    |       |
| 2009                  |       |       | 946        |                    |       |
| 2010                  |       |       | 664        |                    |       |
| Thereafter            |       |       | 672        |                    |       |
| Total  amortization   |       |       | $          | 10,272                  |       |   |

 

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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,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                 | ** ** | **(In thousands)**                | ** ** |
| Current:                   |       |                                   |       |   |   |   |   |
| Federal                    |       | $                                      | 1,375      |   | $ | (1,178 | ) | $ | 1,062 |   |
| State                      |       | 267                                    |       | 283 |   | 293 |   |
| Puerto Rico                |       | 847                                    |       | 288 |   | 334 |   |
| Foreign                    |       | 635                                    |       | 65 |   | 160 |   |
|                       |       | 3,124                                  |       | (542 | ) | 1,849 |   |
| Deferred:                  |       |                                   |       |   |   |   |   |
| Federal                    |       | (447                                   | )          | (1,445 | ) | (13,159 | ) |
| State                      |       | 196                                    |       | (147 | ) | (663 | ) |
| Puerto Rico                |       | (345                                   | )          | — |   | — |   |
| Foreign                    |       | 16                                     |       | 11 |   | (180 | ) |
|                       |       | (580                                   | )          | (1,581 | ) | (14,002 | ) |
| Total provision  (benefit) |       | $                                      | 2,544      |   | $ | (2,123 | ) | $ | (12,153 | ) |

 

Deferredincome tax provision (benefit) is recorded when income and expenses arerecognized in different periods for financial reporting and tax purposes. Thechange in the valuation allowance has no impact on the consolidated statementof operations, as it relates to the tax benefit on stock options. Thesignificant components of deferred income tax provision (benefit) are asfollows:
| ** **                                                | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **(In thousands)**                | ** ** |
| Tax credit and net  operating loss carryforwards          |       | $                                      | (1,838     | ) | $ | (6,719 | ) | $ | (15,437 | ) |
| Reserves and  accruals                                    |       | (661                                   | )          | 4,020 |   | 523 |   |
| Unrealized gain  (loss) on investment                     |       | —                                 |       | — |   | 260 |   |
| Depreciation and  amortization                            |       | (41                                    | )          | (1,338 | ) | 616 |   |
| Deferred taxes on  Puerto Rico earnings                   |       | (813                                   | )          | (263 | ) | (7 | ) |
| Change in  valuation allowance                            |       | 2,773                                  |       | 2,719 |   | 43 |   |
| Total deferred  tax provision—continuing  operations |       | (580                                   | )          | (1,581 | ) | (14,002 | ) |
| Deferred taxes on  other comprehensive income             |       | —                                 |       | — |   | (62 | ) |
| Total deferred tax  provision                             |       | $                                      | (580       | ) | $ | (1,581 | ) | $ | (14,064 | ) |

 

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

The effective income taxrate differs from the federal statutory income tax rate as follows:
| ** **                                           | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal statutory  income tax (benefit) expense rate |       | 35.0                                   | %          | (35.0 | )% | (35.0 | )% |
| Federal tax benefit  of Puerto Rico operations       |       | (26.5                                  | )          | (28.0 | ) | (2.9 | ) |
| Puerto Rico taxes                                    |       | 2.5                                    |       | 6.6 |   | 0.7 |   |
| State income  taxes, net of federal benefit          |       | 2.1                                    |       | 2.9 |   | (0.8 | ) |
| Goodwill                                             |       | —                                 |       | 2.2 |   | 12.3 |   |
| Other                                                |       | (0.6                                   | )          | 2.8 |   | (0.4 | ) |
| Effective income tax  rate                           |       | 12.5                                   | %          | (48.5 | )% | (26.1 | )% |

 

Theprincipal components of deferred tax assets and liabilities are as follows:
| ** **                       | ** ** | **Year ended June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(In thousands)**                | ** ** |
| Deferred tax  assets:            |       |                                   |       |   |   |
| Net operating loss carryforwards |       | $                                      | 23,458     |   | $ | 21,588 |   |
| Tax credit carryforwards.        |       | 11,202                                 |       | 11,234 |   |
| Reserves and accruals.           |       | 6,312                                  |       | 5,650 |   |
| Depreciation and amortization    |       | 11,517                                 |       | 11,476 |   |
|                             |       | 52,489                                 |       | 49,948 |   |
| Valuation  allowance             |       | (2,822                                 | )          | (2,822 | ) |
| Total deferred  tax assets       |       | 49,667                                 |       | 47,126 |   |
| Deferred tax  liabilities:       |       |                                   |       |   |   |
| Unremitted Puerto Rico earnings  |       | 929                                    |       | 1,741 |   |
|                             |       | 929                                    |       | 1,741 |   |
| Net deferred tax  assets         |       | $                                      | 48,738     |   | $ | 45,385 |   |

 

The increase of net deferred tax assets of $3.35million during fiscal 2005 includes the deferred tax provision on continuingoperations shown above of $0.58 million plus $2.77 million of deferred taxassets related to the recognition of stock option benefits.

Netdeferred tax assets are comprised of the following:
| ** **                | ** ** | **Year ended June 30,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(In thousands)**                | ** ** |
| Current assets.           |       | $                                      | 6,312      |   | $ | 5,650 |   |
| Non-current  assets.      |       | 42,845                                 |       | 40,153 |   |
| Non-current  liabilities. |       | (419                                   | )          | (418 | ) |
| Net deferred tax assets   |       | $                                      | 48,738     |   | $ | 45,385 |   |

 

As of June 30, 2005, for federal income taxpurposes, we had regular net operating loss carryforwards of approximately$67.0 million, which will expire in years 2021 through 2024. We had Californiaregular net operating loss carryforwards of approximately $21.8 million, whichwill expire in years 2013 through 2016.

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

Also, we had federal research and development taxcredit carryforwards of approximately $5.7 million that will expire in theyears 2008 through 2023, 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 $2.0 million, which have no expiration date.

During fiscal 2005, we reviewed the realizability ofdeferred tax assets and determined that $2.75 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, 2005, the valuation allowance of $2.8million was attributable to the tax benefit of potentially 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 fiscal 2016.In addition, this subsidiary is taxed under Section 936 of the U.S.Internal Revenue Code, which exempts qualified Puerto Rico source earnings,subject to wage-based and other limitations, from federal income taxes throughfiscal 2006. Taxes have been provided on this subsidiary’s earnings, all ofwhich we intend to remit to the U.S. As of June 30, 2005, the totalunremitted earnings of the Puerto Rico subsidiary and the related tax liabilitywere approximately $41.0 million and $0.9 million, respectively.

On October 22, 2004,the American Jobs Creation Act (the “Jobs Act”) was signed into law. The JobsAct includes a deduction of 85% for certain foreign earnings that arerepatriated, as defined in the Jobs Act. The deduction is subject to a numberof limitations and uncertainty remains as to how to interpret numerousprovisions in the Jobs Act. Based on our analysis to date, we have decided notto repatriate foreign earnings under the provisions of the Jobs Act.

**Note J—Contingencies**

In late 1996, Datum (which we acquired in October 2002)received notice of potential environmental contamination from the owner of apremises in Austin, Texas that had previously been occupied by Austron, Inc.,a Datum subsidiary for its wireline operation (“Austron”), prior to Datum’sacquisition of Austron in 1988. Although Austron remediated the site pursuantto then-existing environmental regulations in connection with vacating the sitein 1983, the applicable environmental regulations were modified after 1983,providing the basis for the property owner’s claim that the soil at the sitecontains the same contaminants that were the focus of Austron’s previousremediation efforts. In compliance with current law, Datum had established theextent of the site contamination, which extends to adjoining properties ownedby third parties. In May 2004, we received a demand from the owner ofseveral adjoining lots for damages, as well as seeking an indemnity for thecontamination and a promise to remediate the contamination. The adjacentproperty owner has not filed suit. We believe that we will continue to incurmonitoring costs for the next several years in connection with the site contaminationand may be subject to demands and claims from other adjoining landowners inaddition to the claim for remediation discussed above, and the amount of suchcosts and the extent of the our exposure to such claims cannot be determined atthis time. Although there can be no assurance that the costs of remediationefforts, the property owners’ claims or any related governmental action willnot singly or in the aggregate have a material adverse effect on our financialcondition or results of operations, we do not believe our ultimate 

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

aggregate liability willhave such an effect. We currently have an accrual of $0.8 million forremediation costs, appraisal fees and 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.

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—Related Party 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 30,2005, 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 waspaid.

During fiscal 2005, wepaid a total of $12,500 for consulting fees to four directors of Symmetricom inaddition to the regular director compensation for attendance at Board andCommittee meetings.

**Note L—Long TermObligations**
| ** **                              | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(In thousands)**                | ** ** |
| Long-term obligations:                  |       |                                   |       |   |   |
| Capital lease                           |       | $                                      | 4,953      |   | $ | 6,012 |   |
| Less—current  maturities           |       | (1,040                                 | )          | (1,058 | ) |
| Lease loss accrual                      |       | 279                                    |       | 898 |   |
| Bond payable                            |       | 2,475                                  |       | 2,545 |   |
| Convertible subordinate  notes          |       | 120,000                                |       | — |   |
| Less—current  maturities           |       | (70                                    | )          | (70 | ) |
| Post-retirement benefits  (Note E), net |       | 370                                    |       | 500 |   |
| Total                                   |       | $                                      | 126,967    |   | $ | 8,827 |   |

 

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 in June and December ofeach year beginning on December 15, 2005. The Notes are unsecuredobligations and are subordinated in right of payment to all of our existing andfuture senior debt, including our indebtedness under our senior creditfacilities. The Notes are structurally subordinated to all indebtedness andliabilities 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:

·  Prior to June 15, 2023, if the commonstock price for a least 20 trading days in the period of 30 consecutive daysending on the last trading day of the calendar quarter preceding the quarter inwhich the conversion occurs is more than 125% of the conversion price of thenotes in effect on that 30th trading day;

·  On or after June 15, 2023, at all timeson or after any date on which the common stock price is more than 125% of thethen current conversion price;

·  During the five consecutive business-dayperiod following any five consecutive trading-day period in which the tradingprice for the notes for each such trading-day was less than 95% of the averageof the sale price of our common stock during such five trading-day periodmultiplied by the then current conversion rate;

·  If we have called the particular notes forredemption and the redemption has not yet occurred; or

·  Upon the occurrence of specified corporatetransactions.

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 2, 2005, the reported closing bid price ofour common stock was $9.91 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. The line of creditcontains certain financial covenants and restrictions. The new line of creditexpires on November 1, 2006. No borrowings were outstanding as of June 30,2005.

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, 2005,the bond balance was $2.5 million.

**Note L—Benefit Plans**

*401(k) Plan*

Symmetricom 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 ofSymmetricom 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 will bemade based upon achievement of company profit performance goals. Employeecontributions vest immediately. Employer matching contributions vest ratablyover three years. Symmetricom made matching contribution payments of $0.7million, $0.4 million and $0.1 million in fiscal 2005, 2004 and 2003,respectively.

*DeferredCompensation Plan*

Symmetricom has a deferredcompensation plan that allows outside directors and certain U.S. employees tocontribute up to 100% of their compensation, provided that their contributiondoes not reduce their salary to an amount that is less than the amountnecessary to pay applicable employment taxes and other withholding obligations.The Board of Directors is authorized to make discretionary contributions to theaccounts of participants. No discretionary contributions were made in fiscal2005, 2004, and 2003.

**Note M—Stockholders’ Equity**

*Stock Option Plans*

Symmetricom has an employee stock option plan underwhich employees and consultants may be granted non-qualified and incentiveoptions to purchase shares of Symmetricom’s common stock. The plan was amendedin fiscal 2003, in connection with the tender offer during the fourth quarterof fiscal 2003, to effectively provide that restricted stock could be grantedand repurchased for no cash purchase price. Stock appreciation rights may alsobe granted under this plan; however, none have been granted to date. Inaddition, Symmetricom has a director stock option plan under which non-employeedirectors are granted options each January to purchase 10,000 shares ofSymmetricom’s common stock. All options have been granted at the fair marketvalue of our common stock on the date of grant and expire no later than tenyears from the date of grant. Options generally vest over three years.

On June 7, 2002, the Board of Directors adoptedthe 2002 Stock Incentive Plan under which employees may be grantednon-statutory stock options. Under this plan there will be no awards to theofficers or directors of the Company unless it is offered at the time ofinitial employment of an officer. This plan has 0.7 million shares reserved forissuance as of June 30, 2005.

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

Stockoption activity for the three years ended June 30, 2005 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, 2002 |       |                                                                  | 2,306      |                         |       |   | 5,292 |   |   |   | $ | 7.31 |   |   |
| Authorized                      |       |                                                                  | 3,416      |                         |       |   | — |   |   |   | — |   |   |
| Granted                         |       |                                                                  | (4,230     | )                            |       |   | 3,894 |   |   |   | 4.74 |   |   |
| Exercised                       |       |                                                                  | —     |                         |       |   | (157 | ) |   |   | 2.91 |   |   |
| Canceled                        |       |                                                                  | 2,735      |                         |       |   | (2,735 | ) |   |   | 9.45 |   |   |
| Expired                         |       |                                                                  | (469       | )                            |       |   | — |   |   |   | — |   |   |
| 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 |   |   |

 

Thefollowing table summarizes information about stock options outstanding as of June 30,2005:
| ** **               | ** ** | ** **              | ** ** | **Remaining**       | ** ** | **Weighted**            | ** ** | ** **              | ** ** | **Weighted** | ** ** |
|--------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|--------------|------------|
| **Range of**        | ** ** | **Number of**      | ** ** | **Contractual**     | ** ** | **Average**             | ** ** | **Number of**      | ** ** | **Average**  | ** ** |
| **Exercise Prices** | ** ** | ** **              | ** ** | **Shares**          | ** ** | **Life**                | ** ** | **Exercise Price** | ** ** | **Shares**   | ** ** | **Exercise Price** | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** | **(In years)** | ** ** | **(In thousands)** | ** ** |
| $2.52 - $4.29            |       |                    | 403        |                |       |                    | 4.10       |                    |       |         | $          | 3.55 |   |   |   | 296 |   |   |   | $ | 3.77 |   |   |
| $4.33 - $4.33            |       |                    | 582        |                |       |                    | 6.93       |                    |       |         | 4.33       |   |   |   | 581 |   |   |   | 4.33 |   |   |
| $4.36 - $4.99            |       |                    | 461        |                |       |                    | 3.67       |                    |       |         | 4.77       |   |   |   | 388 |   |   |   | 4.83 |   |   |
| $5.02 - $5.95            |       |                    | 491        |                |       |                    | 5.14       |                    |       |         | 5.53       |   |   |   | 490 |   |   |   | 5.53 |   |   |
| $6.04 - $7.08            |       |                    | 71         |                |       |                    | 5.64       |                    |       |         | 6.80       |   |   |   | 59 |   |   |   | 6.87 |   |   |
| $7.25 - $7.25            |       |                    | 720        |                |       |                    | 9.09       |                    |       |         | 7.25       |   |   |   | — |   |   |   | — |   |   |
| $7.29 - $9.19            |       |                    | 444        |                |       |                    | 6.27       |                    |       |         | 7.90       |   |   |   | 294 |   |   |   | 7.86 |   |   |
| $9.24 - $9.54            |       |                    | 258        |                |       |                    | 7.91       |                    |       |         | 9.43       |   |   |   | 86 |   |   |   | 9.41 |   |   |
| $9.75 - $9.75            |       |                    | 686        |                |       |                    | 8.76       |                    |       |         | 9.75       |   |   |   | 166 |   |   |   | 9.75 |   |   |
| $9.77 - $14.81           |       |                    | 209        |                |       |                    | 8.90       |                    |       |         | 10.70      |   |   |   | 27 |   |   |   | 13.35 |   |   |
| $2.52 - $14.81           |       |                    | 4,325      |                |       |                    | 6.83       |                    |       |         | $          | 6.81 |   |   |   | 2,387 |   |   |   | $ | 5.75 |   |   |
|                          |            |                         |            |                     |            |                         |            |                         |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of June 30, 2005,2004 and 2003, the number of shares and weighted average exercise priceunderlying exercisable options were 2,387,119 at $5.75, 3,112,002 at $5.26 and4,338,074 at $4.95, respectively.

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

*Stock-BasedCompensation*

UnderAPB 25, Symmetricom generally recognizes no compensation expense with respectto stock-based awards, including restricted stock to employees. As discussed inNote A, we account for our stock-based awards using the intrinsic value methodin accordance with APB 25 and its related interpretations. SFAS No. 123requires the disclosure of pro forma net income (loss) and earnings (loss) pershare as if we had adopted the fair value method as of the beginning of 1996.The weighted average estimated fair value of options granted was $5.11 in 2005,$6.07 in 2004 and $0.86 in 2003. Our calculations were made using theBlack-Scholes option-pricing model. The fair value of Symmetricom’s stock-basedawards to employees was estimated assuming no expected dividend and thefollowing weighted-average assumptions for fiscal 2005, 2004 and 2003:
| ** **                              | ** ** | **Stock Option Plans** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life  after vesting (in years) |       | 1.6                              |       | 2.3 |   | 2.0 |   |
| Risk-free  interest rate                |       | 4.2                              | %          | 3.6 | % | 2.9 | % |
| Volatility                              |       | 77.1                             | %          | 82.2 | % | 82.1 | % |

 

*Employee StockPurchase Plan*

Symmetricom had an employee stock purchase plan underwhich eligible employees may authorize payroll deductions of up to 10% of theircompensation to purchase shares of our common stock at 85% of the fair marketvalue at certain specified dates. However, due to an inadequate number ofshares of our common stock authorized under this plan, the plan was suspendedas of August 1, 2003. The weighted average fair value of those purchaserights granted in 2004 and 2003 was $1.48 and $1.52, respectively. Duringfiscal 2004 and 2003, 98,650 and 179,571 shares were purchased at an averageprice of $3.26 and $2.87 per share, respectively.

UnderSFAS No. 123, the fair value of the employees’ purchase rights wasestimated using the Black-Scholes option-pricing model assuming that nodividends were paid during the period and with the following weighted averageassumptions for fiscal 2005, 2004, and 2003:
| ** **               | ** ** | **Employee Stock  Purchase Plan** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life (in years) |       | N/A                                         |       | 0.5 |   | 0.5 |   |
| Risk-free  interest rate |       | N/A                                         |       | 1.1 | % | 1.2 | % |
| Volatility               |       | N/A                                         |       | 85.5 | % | 82.1 | % |

 

Symmetricom’s pro formanet income and earnings per share data required under SFAS No. 123 ispresented in Note A.

*Stock RepurchaseProgram*

On August 18, 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. As of June 30, 2005,there were approximately 0.6 million shares remained eligible for repurchase.There were approximately 46.3 million shares of Symmetricom common stockoutstanding as of June 30, 2005.

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

During fiscal 2005, we repurchased 186,400 shares foran aggregate price of approximately $1.8 million. Upon termination ofemployees, 19,009 shares of restricted stock were forfeited pursuant toexisting agreements.

 
| ** **                                            | ** ** | **Total**          | ** ** | ** **          | ** ** | **Total**          | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **Number of** | ** ** | **Average**         | ** ** | **Number of** | ** ** |
| ** **                                            | ** ** | **Shares**         | ** ** | **Price Paid** | ** ** | **Shares**         | ** ** |
| **Period**                                            | ** ** | ** **         | ** ** | **Purchased**       | ** ** | **per Share** | ** ** | **Forfeited** | ** ** |
| October 1,  2004 through October 31, 2004   |       |               | 17,000     |                |       |               | $          | 9.04 |   |   |   |   |   |   |
| December 1,  2004 through December 31, 2004 |       |               | 45,000     |                |       |               | 9.74       |   |   |   |   |   |   |
| January 1,  2005 through January 31, 2005   |       |               | 25,000     |                |       |               | 8.69       |   |   |   |   |   |   |
| February 1,  2005 through February 28, 2005 |       |               | —     |                |       |               | —     |   |   |   | 14,009 |   |   |
| April 1,  2005 through April 30, 2005       |       |               | 50,000     |                |       |               | 9.80       |   |   |   |   |   |   |
| May 1, 2005  through May 31, 2005           |       |               | —     |                |       |               | —     |   |   |   | 5,000 |   |   |
| June 1, 2005  through June 30, 2005         |       |               | 49,400     |                |       |               | 10.73      |   |   |   |   |   |   |
| Total                                                 |       |               | 186,400    |                |       |               | $          | 9.82 |   |   |   | 19,009 |   |   |
|                                                       |            |                    |            |                     |            |                    |            |  |  |  |  |  |  |  |  |  |

 

We did not repurchase anyshares during fiscal 2004. However, we repurchased 321,000 shares in fiscal2003.

*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 Symmetricom 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 non-taxable dividend and will expire August 2011. The rights will beexercisable only in the event that a person or group acquires 15% or more ofour outstanding common 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 for restricted stock resulted ina deferred compensation charge of $1.1 million. This deferred charge has beenreflected on our consolidated financial statements as of June 30, 2005,2004 and 2003 and was amortized over the five-year vesting period of therestricted stock. However, the achievement of certain financial results duringfiscal year 2005 accelerated the vesting of the restricted 

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

stock, and we recorded achange for all remaining deferred compensation. We did not grant any newoptions to tendering employees for at least six months and one day after thedate that we cancelled options under the offer.

On October 16, 2001,we acquired certain assets and products from Telmax Communications Corporation(“Telmax”), a developer of telecommunications equipment. The purchase price ofthe transaction included 300,000 warrants for Symmetricom’s Common Stock with afair value of $0.8 million. The fair value of the warrants issued wascalculated using the Black-Scholes option-pricing model.  These warrants, with an exercise price of$7.00 per share and expiring on October 16, 2006, are exercisable for100,000 shares of common stock each on April 16, 2004, 2005 and 2006,respectively. There has been no exercise of these warrants in fiscal 2005 andfiscal 2004.

**Note N—Business Segment Information**

Subsequent to the acquisitions of Datum and TrueTime,we reorganized our structure and we now have a total of 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 GlobalPositioning  System (GPS) technologies.Our Wireline Products provide highly accurate and uninterruptible timing tomeet the synchronization requirements of telecommunication networks. Our OEMbase station timing products are designed to deliver stable timing tocellular/PCS base stations through a GPS receiver to capture cesium-based timesignals produced by GPS satellites. Our Broadband Networking products, whichinclude GoWide, a product that provides a high-bandwidth solution formedium-sized businesses without access to optical networks, was reported as asegment in prior periods and now is included in Wireless/OEM Products due tochanges in the management reporting structure. Through our Global Servicesdivision, we offer a broad portfolio of services for our customers around theworld. The services we offer include system planning, network audits, networkmonitoring, maintenance, logistics, and installation. Transmission Products andContract Manufacturing were reported as segments in prior periods, and are nowincluded in Specialty Manufacturing/Other within the Telecom SolutionsDivision.

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.
| ** **                             | ** ** | **Fiscal Year Ended June 30,**    | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Net revenue:                           |       |                                                  |       |   |   |   |   |
| Telecom Solutions Division:            |       |                                                  |       |   |   |   |   |
| Wireline Products                      |       | $                                                     | 83,129     |   | $ | 71,467 |   | $ | 61,494 |   |
| Wireless/OEM Products                  |       | 27,723                                                |       | 34,617 |   | 30,976 |   |
| Global Services                        |       | 9,712                                                 |       | 8,315 |   | 3,852 |   |
| Specialty  Manufacturing/Other         |       | 9,759                                                 |       | 9,537 |   | 4,961 |   |
| Timing, Test and  Measurement Division |       | 58,824                                                |       | 48,911 |   | 30,766 |   |
| Total net revenue                      |       | 189,147                                               |       | 172,847 |   | 132,049 |   |
| Cost of sales:                         |       |                                                  |       |   |   |   |   |
| Telecom Solutions Division:            |       |                                                  |       |   |   |   |   |
| Wireline Products                      |       | 35,848                                                |       | 37,084 |   | 39,392 |   |
| Wireless/OEM Products                  |       | 19,621                                                |       | 25,781 |   | 21,773 |   |
| Global Services                        |       | 5,547                                                 |       | 4,832 |   | 794 |   |
| Specialty  Manufacturing/Other         |       | 8,115                                                 |       | 8,168 |   | 4,166 |   |
| Timing, Test and  Measurement Division |       | 27,589                                                |       | 25,545 |   | 17,293 |   |
| Other cost of sales*                   |       | 3,899                                                 |       | 9,773 |   | 2,300 |   |
| Total cost of sales                    |       | 100,619                                               |       | 111,183 |   | 85,718 |   |
| Gross profit:                          |       |                                                  |       |   |   |   |   |
| Telecom Solutions Division:            |       |                                                  |       |   |   |   |   |
| Wireline Products                      |       | 47,281                                                |       | 34,383 |   | 22,102 |   |
| Wireless/OEM Products                  |       | 8,102                                                 |       | 8,836 |   | 9,203 |   |
| Global Services                        |       | 4,165                                                 |       | 3,483 |   | 3,058 |   |
| Specialty  Manufacturing/Other         |       | 1,644                                                 |       | 1,369 |   | 795 |   |
| Timing, Test and  Measurement Division |       | 31,235                                                |       | 23,366 |   | 13,473 |   |
| Other cost of sales*                   |       | (3,899                                                | )          | (9,773 | ) | (2,300 | ) |
| Total gross profit                     |       | $                                                     | 88,528     |   | $ | 61,664 |   | $ | 46,331 |   |
| Gross margin:                          |       |                                                  |       |   |   |   |   |
| Telecom Solutions Division:            |       |                                                  |       |   |   |   |   |
| Wireline Products                      |       | 56.9                                                  | %          | 48.1 | % | 35.9 | % |
| Wireless/OEM Products                  |       | 29.2                                                  | %          | 25.5 | % | 29.7 | % |
| Global Services                        |       | 42.9                                                  | %          | 41.9 | % | 79.4 | % |
| Specialty  Manufacturing/Other         |       | 16.8                                                  | %          | 14.4 | % | 16.0 | % |
| Timing, Test and  Measurement Division |       | 53.1                                                  | %          | 47.8 | % | 43.8 | % |
| Other cost of sales*                   |       | (2.1                                                  | )%         | (5.7 | )% | (1.7 | )% |
| Total gross margin                     |       | 46.8                                                  | %          | 35.7 | % | 35.1 | % |

----

*                    Includesamortization of purchased technology, write-off of Telmax royalty andapplicable integration and restructuring charges.

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

Our export sales accountedfor 35%, 32%, and 33%, of our net revenue in 2005, 2004, and 2003,respectively. The geographical components of sales are as follows:
| ** **        | ** ** | **Year ended June 30,** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| ** **        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States     |       |                                   | 65         | % |   |   | 68 | % |   |   | 67 | % |   |
| International:    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Asia              |       |                                   | 11         | % |   |   | 12 | % |   |   | 7 | % |   |
| Europe            |       |                                   | 16         | % |   |   | 14 | % |   |   | 15 | % |   |
| Canada            |       |                                   | 2          | % |   |   | 2 | % |   |   | 2 | % |   |
| Latin America     |       |                                   | 5          | % |   |   | 3 | % |   |   | 7 | % |   |
| Rest of the world |       |                                   | 1          | % |   |   | 1 | % |   |   | 2 | % |   |

 

No customer accounted for10% or more of our net revenue in fiscal 2005, 2004, and 2003.

**NoteO—Integration and Restructuring Charges**

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 Emerging Issues Task Force (EITF) IssueNo. 95-3, “Recognition of Liabilities in Connection with PurchaseBusiness Combinations,” and reflected as an increase to goodwill. In addition,we expensed $1.2 million for additional lease loss accrual during the fourthquarter 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 to reduceheadcount primarily in the Telecom Solution Division and to exit our Parkerfacility in Irvine, California, the Lindbergh Avenue facility in Livermore,California and the Brighton facility in the United Kingdom. We reportedintegration and restructuring expenses of $8.2 million in fiscal 2004, ofwhich  $5.9 million is in cost of goodssold and $2.3 million is in operating expenses also the $8.2 million totalexpense consisted of  $2.3 million forfacility costs, $3.7 million for severance and benefits, and $2.2 forother integration and restructuring charges. The $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 

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

$2.3 million inoperating expenses consists of $1.6 million for severance and related costs forthe Irvine shutdown and other division integration, and $0.7 million for landremediation accruals for EPA issues related to a former Datum facility locatedin 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 goodscharges is 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 2005, we did not have any integrationand restructuring charges. All of the accrued severance expenses from theintegration plan have been paid out. The balance of the $0.9 million lease lossaccrual for the facilities as of June 30, 2005 will be paid over the nextseven years.

The following tables showthe details of the restructuring cost accruals, which consist of facilities andseverance costs, for the years ended June 30, 2005 and 2004. Theadjustments are for reclassifications of facility and benefit accruals:
| ** **                                                    | ** ** | **Balance at**     | ** ** | ** **    | ** ** | ** **      | ** ** | ** **        | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|-----------------|------------|-------------------|------------|--------------|------------|---------------------|------------|
| ** **                                                    | ** ** | **June 30,**       | ** ** | **Expenses**  | ** ** | ** **      | ** ** | **June 30,** | ** ** |
| ** **                                                    | ** ** | **2003**                | ** ** | **Additions** | ** ** | **Adjustments** | ** ** | **Total**         | ** ** | **Payments** | ** ** | **2004**            | ** ** |
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Facilities  (October 2002 to  June 2003)            |       |                    | $          | 2,165         |       |            |       | $                 | 306        |         |       |                | $          | 361 |   |   | $ | 667 |   |   | $ | (1,208 | ) |   |   | $ | 1,624 |   |   |
| Facilities  (fiscal 2004)                                     |       |                    | —     |          |       |            | 1,643      |              |       |         | —     |                |       | 1,643 |   |   | (315 | ) |   |   | 1,328 |   |   |
|                                                          |       |                    | 2,165      |          |       |            | 1,949      |              |       |         | 361        |                |       | 2,310 |   |   | (1,523 | ) |   |   | 2,952 |   |   |
| Severance and benefits (October 2002 to  June 2003) |       |                    | 886        |          |       |            | —     |              |       |         | 38         |                |       | 38 |   |   | (924 | ) |   |   | — |   |   |
| Severance and benefits (fiscal 2004)                          |       |                    | —     |          |       |            | 3,697      |              |       |         | —     |                |       | 3,697 |   |   | (3,682 | ) |   |   | 15 |   |   |
|                                                          |       |                    | 886        |          |       |            | 3,697      |              |       |         | 38         |                |       | 3,735 |   |   | (4,606 | ) |   |   | 15 |   |   |
| Total severance and facilities                                |       |                    | 3,051      |          |       |            | 5,646      |              |       |         | 399        |                |       | 6,045 |   |   | (6,129 | ) |   |   | 2,967 |   |   |
| All other integration and restructuring changes (fiscal 2004) |       |                    | —     |          |       |            | 2,143      |              |       |         | —     |                |       | 2,143 |   |   | (1,443 | ) |   |   | 700 |   |   |
| Total                                                         |       |                    | $          | 3,051         |       |            |       | $                 | 7,789      |         |       |                | $          | 399 |   |   | $ | 8,188 |   |   | $ | (7,572 | ) |   |   | $ | 3,667 |   |   |

 
| ** **                                                     | ** ** | **Balance at**     | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|-------------------|------------|------------|------------|--------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **June 30,**       | ** ** | **Expenses**  | ** ** | **June 30,** | ** ** |
| ** **                                                     | ** ** | **2004**                | ** ** | **Additions** | ** ** | **Adjustments**   | ** ** | **Total**  | ** ** | **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 |   |   |

 

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

**Note P—Subsequent Events**

On August 1, 2005, Symmetricom, Inc. completedthe acquisition of Agilent’s Frequency and Time Standards product line. Underthe terms of the transaction, Symmetricom paid approximately $8.0 million incash. All 16 Agilent employees supporting the product line agreed to joinSymmetricom. Manufacturing of this product line will move to the company’s SanJose, California facilities.

Effective August 4, 2005, the Symmetricom Boardapproved a change in the terms for stock options granted on and after August 4,2005. The life of a stock option grant is now 5 years instead of 10 years. Vestingterms are generally unchanged.

On August 5, 2005, the board of directors ofSymmetricom, Inc. (“Symmetricom”) approved a cash bonus plan for fiscalyear 2006 (the “Plan”). Bonuses under the Plan may be up to 150% of an employee’sbase salary, and will be based upon the company’s revenue and earnings infiscal 2006 in comparison to certain target amounts and upon the achievement ofpersonal goals. Payments under the Plan will be made on a semi-annual basis atthe rate of 30% of the annual bonus amount for first half of the year, and thebalance of 70% of the annual bonus amount will be made at the year end. Paymentsunder the Plan will be made within sixty days of the end of each six-monthperiod. Employees must be on the payroll for the last workday of the six monthperiod to be eligible to participate in the Plan.

On August 18, 2005, the Board of Directorsauthorized the 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. As of June 30, 2005,there were approximately 0.6 million shares remained eligible for repurchase.There were approximately 46.3 million shares of Symmetricom common stockoutstanding as of June 30, 2005.

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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—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on this evaluation, the Company’s managementconcluded that its internal control over financial reporting was effective asof June 30, 2005.

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 maydeteriorate.

The Company’s independent registered public accountingfirm has audited management’s assessment of the effectiveness of the Company’sinternal control over financial reporting as of June 30, 2005 as stated intheir report.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Symmetricom Inc. and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of June 30, 2005,based on criteria established in *InternalControl—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting 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 provides 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. A company’sinternal 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 ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets 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 financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of June 30,2005, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of June 30,2005, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements and financial statement schedule as of andfor the year ended June 30, 2005 of the Company and our report dated September 9,2005 expressed an unqualified opinion on those financial statements andfinancial statement schedule.

DELOITTE &TOUCHE LLPSan Jose, CaliforniaSeptember 9, 2005

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

None.

**PART III**

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

(a)           Executive Officers

See the sectionentitled “Executive Officers of Symmetricom” in Part I of this report.

(b)          Directors

The informationrequired by this item is incorporated by reference from the information underthe caption “Election of Directors—Nominees” contained in the Company’s ProxyStatement to be filed with the Securities and Exchange Commission in connectionwith the solicitation of proxies for the Company’s 2005 Annual Meeting ofShareholders to be held on October 27, 2005 (the “Proxy Statement”).

(c)           Section 16(a) BeneficialOwnership Reporting Compliance

Section 16(a) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), requiresa company’s directors, officers and beneficial owners of more than 10% of anyclass of equity securities of the company registered pursuant to section 12 ofthe Exchange Act to file with the Securities and Exchange Commission (the “SEC”)initial reports of beneficial ownership and reports of changes in ownership ofCommon Stock and other equity securities of Symmetricom registered pursuant tosection 12 of the Exchange Act. This information is contained in the sectioncalled “Section 16(A) Beneficial Ownership Reporting Compliance” inthe Proxy Statement and is incorporated herein by reference.

(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,” “Election of Directors—Director Compensation,” and “CertainTransactions” contained in the 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—ShareOwnership by Principal Shareholders and Management” contained in the ProxyStatement.

**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 Independent Auditors of the Company” in our Proxy Statement.

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)   *Financial Statements andFinancial Statement Schedule*

1.   *Financial Statement.**  *Reference is made to the Index toConsolidated Statements of Symmetricom, Inc. under Item 8 of Part IIhereof.

2.*FinancialStatement Schedule*.   The following financial statement scheduleof Symmetricom for the years ended June 30, 2005, 2004, and 2003, is filedas part of this report on Form 10-K and should be read in conjunction withthe 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**                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1              |       | Purchase Agreement,  dated as of June 2, 2005, between Symmetricom, Inc. and the Initial  Purchasers (incorporated by reference to exhibit 1.1 to the Registrant’s  current report on form 8-k filed in June 8, 2005).                                                                                                                                                                                                                                  |
| 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. Symmetricom 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. Symmetricom will furnish  copies of the omitted schedules and exhibits to the Commission upon request:                                                                                                                                                                                                                                                                              |
|             |       | Disclosure Schedule                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

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|         |   | 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                                                                                                                                                                                                                                                                                     |
| 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  Registrants 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 Symmetricom, Inc. 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 Symmetricom, Inc. 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 October 23, 2001 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#   |   | 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).     |
| 10.4#   |   | Amendment to the  Symmetricom, Inc. 1999 Employee Stock Option Plan (incorporated by  reference from Exhibit (d)(6) to the Registrant’s tender offer  statement on Schedule TO, filed May 28, 2003).                                                                                                                          |
| 10.5#   |   | 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).                                                                                                                                                                   |
| 10.6    |   | 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).                                                                                                           |
| 10.7    |   | 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).                                                                                                                                                                            |

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| 10.8#  |   | 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).                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9#  |   | 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).                                                                                                                 |
| 10.10# |   | 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).                                                                                |
| 10.11# |   | 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).                                                                                                      |
| 10.12# |   | 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).                                                                             |
| 10.13# |   | 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). |
| 10.14# |   | 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).                                                                                                       |
| 10.15# |   | 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).                                                                                      |
| 10.16# |   | Change of Control  Agreement with William Slater dated February 8, 2002 (incorporated by  reference from exhibit 10.1 to the Registrant’s quarterly report on  Form 10-Q filed May 14, 2002).                                                                                                                        |
| 10.17# |   | 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).                                                                                       |
| 10.18# |   | Form of Restricted  Stock Award (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).                                                                                                                              |
| 10.19  |   | 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).                                                                                                   |
| 10.20  |   | 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).  |

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| 10.21  |   | 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).                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22  |   | 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).                                                                         |
| 10.23  |   | 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).                                                                                                     |
| 10.24# |   | 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).                                                                                                                                                                                      |
| 10.25# |   | 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).                                                                                                                                                            |
| 10.26# |   | Datum Inc.’s 1994 Stock  Incentive Plan (incorporated by reference from Datum Inc.’s Registration  Statement on Form S-8, File No. 33-79772).                                                                                                                                                                                                                          |
| 10.27# |   | 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).                                                                                                                                    |
| 10.28# |   | 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).                                                                                                                                                                          |
| 10.29  |   | 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). |
| 10.30  |   | 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).                                                    |
| 10.31  |   | 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).                                                                                                                                       |
| 10.32  |   | 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).                                                                                                                                     |
| 10.33  |   | 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).                                                                                                                                                         |

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| 10.34# |   | 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).                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.35  |   | 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 Secretary of the Commission  pursuant to the Company’s application requesting confidential treatment under  Rule 406 of the Securities Act of 1933). |
| 10.36  |   | 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).                                                                                                                                                                                        |
| 10.37  |   | 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).                                                                                                                                                                      |
| 10.38  |   | 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).                                                                                                                                                                         |
| 10.39  |   | Credit Agreement dated  May 1, 2004, between the Company and Wells Fargo Bank, National  Association                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.40  |   | Revolving Line of Credit  Note dated June 1, 2005, between the Company and Wells Fargo Bank,  National Association                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.41  |   | First Amendment To  Credit Agreement Jun 1, 2005, between the Company and Wells Fargo Bank,  National Association                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 14     |   | Code of Ethics  (incorporated by reference to Exhibit 14.1 of the Company’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 96 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 Schedule*

See Item 15(a)(2) above.

94

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**SCHEDULEII**

**SYMMETRICOM,INC.**

**VALUATION AND QUALIFYINGACCOUNTS AND RESERVES**

**(Inthousands)**
| ** **                                   | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | ** **        | ** ** | ** **                | ** ** |
|----------------------------------------------|------------|-----------------------|------------|---------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | ** **        | ** ** | **Balance at**       | ** ** |
| ** **                                   | ** ** | **Year**              | ** ** | **Expenses**        | ** ** | **Deductions(1)** | ** ** | **End of Year** | ** ** |
| 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      |   |   |   | $ | 2,886 |   |   |   | $ | 3,194 |   |   |
| Allowance for doubtful accounts              |       |                  | $          | 974                 |       |              |       | $                         | 26         |   |   |   | $ | 237 |   |   |   | $ | 763 |   |   |
| Allowance for excess and obsolete inventory  |       |                  | $          | 6,532               |       |              |       | $                         | 909        |   |   |   | $ | 1,824 |   |   |   | $ | 5,617 |   |   |
| Year ended June 30,  2003:              |       |                  |       |                |       |              |       |                      |       |   |   |   |   |   |   |   |   |
| Accrued warranty expense                     |       |                  | $          | 4,950               |       |              |       | $                         | 3,800      | (2) |   |   | $ | 4,729 |   |   |   | $ | 4,021 |   |   |
| Allowance for doubtful accounts              |       |                  | $          | 789                 |       |              |       | $                         | 346        |   |   |   | $ | 161 |   |   |   | $ | 974 |   |   |
| Allowance for  excess and obsolete inventory |       |                  | $          | 4,718               |       |              |       | $                         | 3,926      |   |   |   | $ | 2,112 |   |   |   | $ | 6,532 |   |   |

----

(1)          Deductions representcosts charged or amounts written off against the reserve or allowance.

(2)          Amount includes balancesfrom Datum and TrueTime at acquisition.

95

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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 12,  2005 |       | 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, with exhibitsthereto and other documents in connection therewith, with the Securities andExchange Commission, hereby ratifying and confirming all that each of saidattorneys-in-fact or their substitute or substitutes may do or cause to be doneby 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 12, 2005 |
| **Thomas W. Steipp**                                |           | Executive  Officer) and Director                |       |                    |
| /s/    WILLIAM SLATER           |           | Chief Financial  Officer and Secretary          |       | September 12, 2005 |
| **William  Slater**                                 |           | (Principal  Financial and

Accounting  Officer) |       |                    |
| /s/    ROBERT T. CLARKSON       |           | Chairman of the Board                           |       | September 12, 2005 |
| **Robert  T. Clarkson**                             |           |                                            |       |                    |
| /s/    ALFRED BOSCHULTE         |           | Director                                        |       | September 12, 2005 |
| **Alfred  Boschulte**                               |           |                                            |       |                    |
| **/**s/    ELIZABETH A. FETTER  |           | Director                                        |       | September 12, 2005 |
| **Elizabeth  A. Fetter**                            |           |                                            |       |                    |
| /s/    ROBERT M. NEUMEISTER JR. |           | Director                                        |       | September 12, 2005 |
| **Robert  M. Neumeister Jr.**                       |           |                                            |       |                    |
| /s/    RICHARD W. OLIVER        |           | Director                                        |       | September 12, 2005 |
| Richard W. Oliver                                   |           |                                            |       |                    |
| /s/    RICHARD N. SNYDER        |           | Director                                        |       | September 12, 2005 |
| **Richard  N. Snyder**                              |           |                                            |       |                    |
| /s/    ROBERT J. STANZIONE |           | Director                                        |       | September 12, 2005 |
| **Robert  J. Stanzione**                            |           |                                            |       |                    |

 

96

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1              |       | Purchase Agreement,  dated as of June 2, 2005, between Symmetricom, Inc. and the Initial  Purchasers (incorporated by reference to exhibit 1.1 to the Registrant’s  current report on form 8-k filed in June 8, 2005).                                                                                                                                                                                                                                       |
| 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. Symmetricom 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. Symmetricom 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                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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  Registrants 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  Symmetricom, Inc. 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 Symmetricom, Inc. 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 October 23, 2001 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#  |   | 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).     |
| 10.4#  |   | Amendment to the  Symmetricom, Inc. 1999 Employee Stock Option Plan (incorporated by  reference from Exhibit (d)(6) to the Registrant’s tender offer  statement on Schedule TO, filed May 28, 2003).                                                                                                                          |
| 10.5#  |   | 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).                                                                                                                                                                   |
| 10.6   |   | 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).                                                                                                           |
| 10.7   |   | 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).                                                                                                                                                                            |
| 10.8#  |   | 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).                                                                                                                                 |
| 10.9#  |   | 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).                                                                                                                               |
| 10.10# |   | 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).                                                                                              |
| 10.11# |   | 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).                                                                                                                    |
| 10.12# |   | 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).                                                                                           |

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| 10.13# |   | 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).                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14# |   | 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).                                                                                                                      |
| 10.15# |   | 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).                                                                                                     |
| 10.16# |   | Change of Control  Agreement with William Slater dated February 8, 2002 (incorporated by  reference from exhibit 10.1 to the Registrant’s quarterly report on  Form 10-Q filed May 14, 2002).                                                                                                                                       |
| 10.17# |   | 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).                                                                                                      |
| 10.18# |   | Form of Restricted  Stock Award (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).                                                                                                                                             |
| 10.19  |   | 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).                                                                                                                  |
| 10.20  |   | 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).                 |
| 10.21  |   | 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). |
| 10.22  |   | 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).                                      |
| 10.23  |   | 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).                                                                  |
| 10.24# |   | 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).                                                                                                                                                   |
| 10.25# |   | 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).                                                                                                                         |
| 10.26# |   | Datum Inc.’s 1994 Stock  Incentive Plan (incorporated by reference from Datum Inc.’s Registration  Statement on Form S-8, File No. 33-79772).                                                                                                                                                                                       |

----

 
| 10.27# |   | 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).                                                                                                                                                                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28# |   | 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).                                                                                                                                                                                                                                                                                                                          |
| 10.29  |   | 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).                                                                                                                                                 |
| 10.30  |   | 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).                                                                                                                                                                                                    |
| 10.31  |   | 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).                                                                                                                                                                                                                                                                                       |
| 10.32  |   | 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).                                                                                                                                                                                                                                                                                     |
| 10.33  |   | 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).                                                                                                                                                                                                                                                                                                         |
| 10.34# |   | 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).                                                                                                                                                                                                                                                                                                  |
| 10.35  |   | 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 Secretary of the Commission pursuant to the  Company’s application requesting confidential treatment under Rule 406  of the Securities Act of 1933). |
| 10.36  |   | 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).                                                                                                                                                                                        |
| 10.37  |   | 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).                                                                                                                                                                      |
| 10.38  |   | 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).                                                                                                                                                                         |
| 10.39  |   | Credit Agreement dated  May 1, 2004, between the Company and Wells Fargo Bank, National  Association                                                                                                                                                                                                                                                                                                                                                                                                                                  |

----

 
| 10.40 |   | Revolving Line of Credit Note dated May 1,  2004, between the Company and Wells Fargo Bank, National Association                               |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.41 |   | First Amendment To  Credit Agreement Jun 1, 2005, between the Company and Wells Fargo Bank,  National Association                                   |
| 14    |   | Code of Ethics  (incorporated by reference to Exhibit 14.1 of the Company’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 96 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 Schedule*

See Item 15(a)(2) above.

----