10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the fiscal year ended March 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the transition period from           to          .

Commission file number 0-15895

STRATEX NETWORKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State of Incorporation)	77-0016028 (I.R.S. Employer Identification No.)
120 Rose Orchard Way San Jose, California (Address of Principal Executive Offices)	95134 (Zip Code)

(Registrant’s Telephone Number, Including Area Code):

408-943-0777

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.01 Per Share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  þ

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

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the closing price of the common stock of $2.60 per share on the Nasdaq National Market as of September 30, 2005 was approximately $180,633,099.

As of June 1, 2006, there were 97,217,330 shares of Common Stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the registrant’s Annual Report to Stockholders for the year ended March 31, 2006 are incorporated by reference into Parts I and II of this Annual Report on Form 10-K. With the exception of those portions which are incorporated by reference, the registrant’s Annual Report to Stockholders for the year ended March 31, 2006 is not deemed filed as part of this Annual Report on Form 10-K.

2. Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on August 15, 2006 are incorporated by reference into Part II, Item 5 and Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

STRATEX NETWORKS, INC.
2006 FORM 10-K ANNUAL REPORT

PART I
	Item 1	Business	1
	Item 1A	Risk Factors	11
	Item 1B	Unresolved Staff Comments	20
	Item 2	Properties	20
	Item 3	Legal Proceedings	20
	Item 4	Submission of Matters to a Vote of Security Holders	20
PART II
	Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
	Item 6	Selected Financial Data	20
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 8	Financial Statements and Supplementary Data	21
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	21
	Item 9A	Controls and Procedures	21
	Item 9B	Other Information	24
PART III
	Item 10	Directors and Executive Officers of the Registrant	24
	Item 11	Executive Compensation	24
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
	Item 13	Certain Relationships and Related Transactions	25
	Item 14	Principal Accountant Fees and Services	25
PART IV
	Item 15	Exhibits and Financial Statement Schedule	25
Signatures			27
EXHIBIT 4.10
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 10.20
EXHIBIT 13.1
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Item 1.   Business

The following Business Section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in, or incorporated by reference into, this Form 10-K.

Web Site Access to Company’s Reports

Our Internet Web site address is www.stratexnet.com. The content of the website is not deemed to be part of this filing. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the “Commission”). We will also provide the reports in electronic or paper form free of charge upon request. Furthermore, all reports we file with the Commission are available free of charge via EDGAR through the Commission’s Web site at www.sec.gov. In addition, the public may read and copy materials filed by us at the Commission’s public reference room located at 101 F. Street. N.E., N.W., Washington, D.C., 20549 and may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.

Introduction

Stratex Networks, Inc., formerly known as Digital Microwave Corporation and DMC Stratex Networks, Inc., was incorporated in California in 1984 and reorganized as a corporation in 1987 under the laws of the State of Delaware. In August 2002, we changed our name from DMC Stratex Networks, Inc. to Stratex Networks, Inc. (the “Company”). We are a leading provider of innovative wireless transmission solutions to mobile wireless carriers and data access providers around the world. Our solutions also address the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. We design, manufacture and market a broad range of products that offer a wide range of transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a wide range of transmission capacities, typically ranging from 64 Kilobits to 2OC-3 or 311 Megabits per second (Mbps). In addition to our product offerings, we provide network planning, design and installation services and work closely with our customers to optimize transmission networks.

We have a long history of introducing innovative products into the telecommunications industry. Our newest product platform, Eclipse, which began shipping in January 2004, is one of the first wireless transmission platforms that combines a broad range of wireless transmission functions into one network processing node. This node contains many functions that previously had to be purchased separately from one or more equipment suppliers. Eclipse has the flexibility to increase transmission speeds and adjust capacity with software upgrades and is designed to simplify complex networks and lower the total cost of ownership over the product life.

The sales of all of our product lines are generated primarily through our worldwide direct sales force. We also generate sales through base station suppliers, distributors and agents.

We have sold over 300,000 microwave radios, which have been installed in over 150 countries. We market our products to service providers directly, as well as indirectly through our relationships with original equipment manufacturer (“OEM”) base station suppliers.

Industry Background

Wireless transmission networks are constructed using microwave radios and other equipment to connect cell sites, switching systems, wire-line transmission systems and other fixed access facilities. Wireless networks range in size from a single transmission link connecting two buildings to complex networks comprised of thousands of wireless connections. The architecture of a network is influenced by several factors, including the available radio frequency spectrum, coordination of frequencies with existing infrastructure, application requirements, environmental factors and local geography.

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Last year we saw an increase in the capital spending in the wireless telecommunications industry as compared to the prior three years. The demand for high speed wireless transmission products has been growing at a slightly higher rate than the wireless industry as a whole. This growth is directly related to the growth in both the use of mobile wireless communications networks and the increased demand for fixed wireless transmission solutions. Major driving factors for such growth include the following:

•  Increase in Global Wireless Subscribers and Minutes of Use.  The number of global wireless subscribers and minutes of use per subscriber are expected to continue to increase. The primary drivers include increased subscription, increased voice minutes of use per subscriber and the growing use by subscribers of data applications. Third generation data applications have been introduced in the developed countries and this has fueled an increase in minutes of data use. We believe that this growth, due to new data services, will continue for the next two to three years.

•  Increased establishment of mobile and fixed wireless telecommunications infrastructures in developing countries.  In parts of the world, telecommunications services are inadequate or unreliable because of the lack of existing infrastructures. To service providers in developing countries seeking to increase the availability and quality of telecommunications and internet access services, wireless solutions are an attractive alternative to the construction or leasing of wireline networks, given their relatively low cost and ease of deployment. As a result, there has been an increased establishment of mobile and fixed wireless telecommunications infrastructures in developing countries. Emerging telecommunications markets in Africa, Asia, the Middle East, Latin America and Eastern Europe are characterized by a need to build out basic telecommunications systems.

•  Technological advances, particularly in the wireless telecommunications market.  The demand for cellular telephone and other wireless services and devices continues to increase due to technological advances and increasing consumer demand for connectivity to data and voice services. New mobile-based services based upon what is commonly referred to as “third-generation” technology is also creating additional demand and growth in mobile networks and their associated infrastructure. The demand for fixed broadband access networks has also increased due to data transmission requirements resulting from Internet access demand. Similar to cellular telephone networks, wireless broadband access is typically less expensive to install and can be installed more rapidly than a wireline or fiber alternative. New and emerging services such as WiMAX are expected to expand over the next several years. Both WiMAX and new high-speed mobile-based technology can be used for a number of applications, including “last mile” broadband connections, hotspots and cellular backhaul, and high-speed enterprise connectivity for business.

•  Global deregulation of telecommunications market and allocation of radio frequencies for broadband wireless access.  Regulatory authorities in different jurisdictions allocate different portions of the radio frequency spectrum for various telecommunications services. Many countries have privatized the state-owned telecommunications monopoly and opened their markets to competitive network service providers. Often these providers choose a wireless transmission service, which causes an increase in the demand for transmission solutions. Such global deregulation of the telecommunications market and the related allocation of radio frequencies for broadband wireless access transmission have led to increased competition to supply wireless-based transmission systems.

We believe that as broadband access and telecommunications requirements grow, wireless systems will continue to be used as transmission systems to support a variety of existing and expanding communications networks and applications. In this regard, we believe that wireless systems will be used to address the connection requirements of several markets and applications, including the broadband access market, cellular applications, and private networks.

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Our Solution

Our solutions are designed to meet the various needs of our wireless transmission customers. Our solutions offer the following benefits:

•  Comprehensive product line.  We offer a comprehensive product line of transmission solutions, network monitoring systems and control systems that address a wide range of transmission frequencies, ranging from 0.3 GHz to 38 GHz, and a wide range of transmission capacities, typically ranging from 64 Kilobits to 2OC-3 or 311 Mbps. Our newest product platform, Eclipse, which began shipping in January 2004, is one of the first transmission platforms that combines a broad range of wireless transmission functions with a network processing node, containing many functions that previously had to be separately purchased from one or more equipment suppliers. Eclipse includes node management, multiplexing, routing and cross-connect functions, as well as the flexibility to increase transmission speeds and adjust capacity through software upgrades. Eclipse is designed to simplify complex networks and lower the total cost of ownership over the product life.

•  Flexible, easily configurable products.  Our use of standard design platforms, flexible architectures and chip designs and software configurable features allows us to offer our customers high-performance products with a high degree of flexibility and functionality, while shortening the time required for us to develop new configurations and capabilities. The software features of our products provide our customers with a greater degree of flexibility in installing, operating and maintaining their networks. Eclipse, our newest product, is a highly scalable and configurable, single platform product. The Eclipse platform utilizes a highly software configurable architecture design, which enables capacity upgrades and provides users with the ability to adapt to changing conditions with minimal cost and disruption. We believe that Eclipse makes it easier for users to plan and deploy their networks.

•  Low total cost of ownership of Eclipse.  Compared to our prior generation products, our Eclipse solution has a relatively low total cost of ownership, based on overall initial acquisition, installation and ongoing operation and maintenance costs. This is due to the following factors: with a single platform, the number of parts is reduced, less rack space is required and fewer spare parts are needed; installation costs are lower because of a simpler installation process due to built-in capability, resulting in less ancillary equipment; and maintenance and operation costs are lower because of the fewer number of parts required to obtain the same functionality; and a longer product life. The highly configurable Eclipse platform also results in a lower total cost of ownership by providing users with the ability to adapt to changing conditions or increase network capacity with lower cost and less disruption to the existing connection.

•  Consulting and support.  In addition to our product offerings, we provide network planning, design and installation services and work closely with our customers to optimize transmission networks. Our sales personnel are highly trained to assist customers with selecting and configuring wireless systems suitable for the customer’s particular needs.

Our Strategy

Our objective is to enhance our position as a leading provider of innovative wireless transmission solutions for the worldwide mobile, network interconnection and broadband access markets. To achieve this objective, our strategy is to:

•  Continue to serve our existing customer base and leverage our global presence and distribution channels.  Since 1985, we have sold over 300,000 microwave radios, which have been installed in over 150 countries. Over 95% of our net sales in fiscal 2006 and 94% of our net sales in fiscal 2005 were derived outside the United States. We intend to leverage our customer base, longstanding presence in many countries and our distribution channels to continue to sell existing and new products. We believe we are well positioned to continue to address worldwide market opportunities for wireless infrastructure.

•  Continue to introduce innovative solutions to meet the needs of our customers.  We have a long history of introducing innovative products into the telecommunications industry. For example, in 2002, we introduced the Altium MX platform, providing a high capacity wireless solution, allowing the deployment of voice and

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advanced data services for mobile backhaul, fixed wireless access and private network applications. In January 2004, we began shipment of our new product Eclipse, one of the first transmission platforms that combines a broad range of wireless transmission functions with a network processing node, containing many functions that previously had to be separately purchased from one or more equipment suppliers. As a result, we believe that Eclipse is a significant innovation that addresses customer needs. We also intend to continue our history of developing and introducing innovative products, enhancing our products, maintaining technological competitiveness and meeting customer requirements through internal development and acquisition.

•  Expand existing markets and explore new market opportunities.  We intend to expand our presence in the mobile wireless market by exploiting market opportunities created by the growing number of global wireless subscribers, increasing global minutes of use and increasing data transmission. We also intend to expand share in the emerging data business. In particular, carrier-grade Ethernet market opportunities are starting to emerge and Eclipse is ideally suited to meet those needs.

Financial information by operating segment and geographic area

For financial information by operating segment and product category, see note 14 “Operating Segment and Geographic Information” to the Consolidated Financial Statements of our 2006 Annual Report to Stockholders. For each of the fiscal years 2006, 2005 and 2004, certain customers exceeded 10% of our net revenues. For further information, see “Customers” on page 7.

Product Portfolio

Our principal product families include the Eclipse^tm Nodal Wireless Transmission system (“Eclipse”), VeloxLE^tm and ProVision, our network management solution. Legacy products moving towards end of life status include the AltiumMX, XP4^tm, DART^tm, DXR^® 700, DXR^® 200, and DXR^® 100.

Eclipse

Eclipse, with first commercial shipment and related revenue in January 2004, combines the capabilities of the Altium, XP4 Plus and DXR 700 products into one product platform. Eclipse has the following benefits:

•  Simplifies complex networks.  Each Eclipse Intelligent Node Unit, or INU, is a complete network node, able to support multiple radio paths. Eclipse allows operators to replace multiple products in their network with a single INU;

•  Single, common product platform with a low total cost of ownership.  Eclipse is a wireless platform that combines low and high capacity, as well as high power capability, into a single, common product platform designed to significantly lower the total cost of ownership of wireless networks over the product life. With a single platform, Eclipse requires fewer parts, less rack space and fewer spare parts than the combination of our current radio products and the non-radio components supplied by other equipment suppliers, which are required for a complete installation. The integration of multiple features in the INU simplifies the installation process and requires less cabling, thereby reducing total installation costs. Over the product life, maintenance and operating costs are anticipated to be significantly lower due to the fewer parts and spares. In addition the customer can increase the capacity of the system by purchasing software upgrades without replacing existing hardware.;

•  Comprehensive capability.  Eclipse is designed to cover low to high capacities, long and short haul applications, wide frequency coverage (5 to 38 GHz) and with traditional TDM and Ethernet transmission capabilities. It also includes a built-in add-drop multiplexer and integrated cross-connect capability;

•  Easily configurable.  Eclipse is configurable with software, allows easy capacity upgrades, and provides users with the ability to adapt to changing conditions with a minimum of cost and disruption. Eclipse is designed to make it easier for users to plan and deploy their networks and requires less training of installation personnel;

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•  New software-based management solutions enable greater control over the network. New software-based management solutions, including the Eclipse Portal craft tool and the latest release of ProVision, are designed to enable greater control over a network by providing simple, user-focused, local or remote configuration control and status monitoring; and

•  Increased network reliability.  Eclipse has been designed to provide increased network reliability to our carrier customers. We have closely monitored the predicted mean time between failures throughout the development process for Eclipse. In addition, with less cabling, less rack space, and fewer spare parts, Eclipse is designed to have a significantly lower failure rate than current products.

•  Capability to easily add new features and products.  Additions to the Eclipse platform in fiscal 2006 include carrier-grade Ethernet products. These have been provided in the form of an Ethernet plug-in for the INU, the DAC ES as well as a Gigabit Ethernet for the INU, the DAC GE. In addition, an Ethernet based, stand-alone IDU, the Connect ES, is capable of providing 50, 100, 150 and 200 mbps capability under software control.

License Exempt Radio Product

•  VeloxLE.  VeloxLE is a license-exempt radio platform. It is available in 2.4 and 5.8 GHz, and 1, 2, 4 or 8 T1/E1 configurations. All options of this product are available for up to 50 Mbps with a mix of E1/T1 or Ethernet interfaces.

Network Monitoring and Control System

ProVision.  The ProVision element manager is a centralized network monitoring and control system for all of our products. Available as a Windows or UNIX based platform, the ProVision element manager can support small network systems as well as large networks of up to 1,000 radio links. The ProVision management system is built on open standards, and it seamlessly integrates into higher-level system management products through commonly available interfaces. The ProVision element manager is compatible with, and is available to manage, all our radio products.

Legacy Products

High Capacity Radio

AltiumMX.  The AltiumMX digital microwave radio began volume shipments in January 1999 and provides high capacity solutions in microwave and millimeter wave bands. The AltiumMX, a Synchronous Optical Networks (SONET)/Synchronous Digital Hierarchy (SDH) capable digital microwave radio, can wirelessly extend or complete SONET and SDH transport networks to complement, or be an alternative to, fiber deployment. Altium additionally features a fully integrated SDM add/drop multiplexer option. AltiumMX’s key attributes of size, performance, flexibility and rapid deployment bring benefits to both interconnect and access applications. AltiumMX digital microwave radios operate at frequencies of 6, 7, 8, 11, 13, 15, 18, 23, 26, 28 and 38 GHz and at OC-3/ STSM-1 (capacity of 155 Mbps) or 2XOC-3 (capacity of 311 Mbps). The Altium MX is being replaced by the Eclipse 300ep and Eclipse 300hp.

Medium-to-Low Capacity Radios

XP4 Plus.  The XP4 Plus series of digital microwave radios provides low-to-medium capacity microwave radio systems for mobile base station connections and fixed wireless access. The XP4 Plus digital microwave radio is deployed worldwide and has comprehensive regulatory approvals for a wide variety of applications and conditions. XP4 Plus options include protection (redundancy), high power, Simple Network Management Protocol (SNMP), Automatic Transmit Power Control (ATPC), and a 100BT Ethernet interface. XP4 Plus has broad platform coverage from 7 to 38 GHz, international deployment capacities of 2/4/8/16xE1 and 1xE3, and U.S. deployment frequencies of 15-38 GHz and capacities of 4/8xDS-1 and 1xDS-3. The XP4 is being replaced by the Eclipse product family.

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DXR 700.  The DXR 700 product family is a high performance radio platform that operates across a range of capacities from 2x2 Mbps to 45 Mbps, using efficient 16 and 64 QAM modulation. A set of advanced features (including forward error correction and an adaptive equalizer) target medium- and long-distance link requirements. Optional errorless diversity protection switching delivers optimal performance under the most difficult radio transmission conditions. The DXR 700 platform covers multiple frequencies from 2 GHz to 11 GHz. The DXR is being replaced by the Eclipse 300ep and Eclipse 300hp.

Customers

We market our products primarily to mobile wireless carriers around the world. Over 90% of our net sales for each of the last three fiscal years have been derived from outside United States. Our solutions also address the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. We also sell our products to agents, distributors and base station suppliers, who provide and install integrated systems to service providers.

Although we have a large customer base, during any given quarter, a small number of customers may account for a significant portion of our net sales. In certain circumstances, we sell our products to service providers through OEMs, which provide the service providers with access to financing and in some instances, protection from fluctuations in foreign currency exchange rates. Our top customer in net sales in fiscal 2006 was PTK Centertel (10%). Our top customer in net sales in fiscal 2005 was General Data Communications Ltd, a Russian distributor (21%). Our top customer in net sales in fiscal 2004 was MTN Nigeria Communications Ltd. (19%). No other customer, other than the ones mentioned above, accounted for more than 10% of net sales for each of the three fiscal years mentioned above. At March 31, 2006, three of our customers accounted for approximately 12%, 11%, and 10% of our $86.4 million backlog.

Sales, Marketing and Service

We believe that a direct and continuing relationship with service providers is a competitive advantage in attracting new customers and satisfying existing ones. As a result, we offer our products and services principally through our own sales, service and support organization, which allows us to closely monitor the needs of our customers. We have offices in the United States, Mexico, the United Kingdom, Portugal, France, Poland, Germany, South Africa, the United Arab Emirates, India, Singapore, Croatia, the People’s Republic of China, Malaysia, Thailand, the Philippines, New Zealand and Nigeria. Our local offices provide us with a better understanding of our customers’ needs and enable us to respond to local issues and unique local requirements. In selected countries, we also market our products through agents, distributors and VARs, as well as base station suppliers. In December 2004, we implemented a cost reduction initiative whereby our sales and service offices in Argentina, Colombia and Brazil were exit into independent distributors.

We have informal, and in some cases formal, relationships with distributors and OEM base station suppliers. Such relationships increase our ability to pursue the limited number of major contract awards each year. In addition, such relationships provide our customers with easier access to financing and to integrated system providers with a variety of equipment and service capabilities. In selected countries, we also market our products through independent agents and distributors, as well as system integrators.

As of March 31, 2006, we employed approximately 224 employees in our sales, marketing, service and support organization. Our sales personnel are highly trained to provide the customer with assistance in selecting and configuring a digital microwave transmission system suitable for the customer’s particular needs. We have repair and service centers in Scotland and the Philippines. Our Scotland service center supports our global customer base and the Philippines service center provides support primarily for our Asian customers. We generally contract with third party service providers to install and maintain customer equipment; however, we do have customer service and support personnel who provide customers with training, installation, service and maintenance of our systems under contract. We generally offer a conditional warranty for all customers on all of our products.

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Research and Development

We are, and historically have been, an industry innovator. Consistent with our history and strategy of introducing innovative products, we intend to continue to focus significant resources on product development to maintain our competitiveness and to support our entry into new markets. We maintain new product development programs that could result in new products and expansion of the Eclipse product line.

We believe that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet customer requirements is essential to our success. Accordingly, we allocate, and intend to continue to allocate, a significant portion of our resources to research and development efforts. During fiscal 2006, we invested $14.5 million or 6.3% of net sales on research and development compared to $16.7 million or 9.2% of net sales in fiscal 2005 and $17.2 million or 10.9% of net sales in fiscal 2004. We expect our research and development spending to be slightly higher in fiscal 2007 due to increases in salaries and related personnel expenses as well as modest increases in personnel employed in this area. As of March 31, 2006, we employed a total of approximately 102 people in our research and development organizations in San Jose, California and Wellington, New Zealand.

Manufacturing

We primarily employ an outsourced manufacturing strategy that relies on contract manufacturers for manufacturing services. We have outsourced the majority of our manufacturing operations to Benchmark Electronics (Benchmark) in Thailand, Microelectronics Technology Inc. (MTI) in Taiwan and China and to GPC Electronics in Australia. We have retained product design and research and development functions for our products.

Although we outsource our product manufacturing, we maintain manufacturing support facilities at San Jose, California and Wellington, New Zealand. Our manufacturing support operations at San Jose and Wellington consist primarily of system testing and quality management of our products. Our manufacturing operations have been certified to International Standards Organization (ISO) 9001 a recognized international quality standard. We have also been certified to the TL9000 standard, a Telecommunication Industry specific quality system standard. As of March 31, 2006, we employed 40 people in manufacturing and manufacturing support functions.

Backlog

Our backlog at March 31, 2006 was $86.4 million, compared with $69.7 million at March 31, 2005. We only include orders scheduled for delivery within twelve months in our backlog. Product orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period because of the timing of orders, delivery intervals, customer and product mix, and the possibility of changes in delivery schedules and additions or cancellations of orders.

Competition

The wireless interconnection and access business is a specialized segment of the wireless telecommunications industry and is extremely competitive. Many of our competitors have more extensive engineering, manufacturing and marketing capabilities and significantly greater financial, technical, and personnel resources than us. In addition, some of our competitors may have greater name recognition, broader product lines, a larger installed base of products and longer-standing customer relationships. Our primary existing and potential competitors include established and emerging companies, such as Alcatel, L.M. Ericsson, the Microwave Communications division of Harris Corporation, NEC, Ceragon Networks, Nokia and Siemens AG. Some of our competitors have product lines that compete with ours, and are also OEMs through which we market and sell our products.

Government Regulation

Radio communications are subject to regulation by governmental laws and international treaties. Our equipment must conform to domestic and international requirements established to avoid interference among users of microwave frequencies and to permit interconnection of telecommunications equipment. We believe that

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we have complied with such rules and regulations with respect to our existing products. Any delays in compliance with respect to future products could delay the introduction of such products. In addition, radio transmission is subject to regulation by foreign laws and international treaties. Equipment to support these services can be marketed only if permitted by suitable frequency allocations and regulations. Failure by the regulatory authorities to allocate suitable frequency spectrum could harm our business, financial condition and results of operations.

The shipments of our products may be subject to governmental export/import license requirements. We believe that we have complied with the export/import license requirements. Denial of export or import licenses by the government can harm our business, financial condition and results of operation.

Our products, in common with those of industry in general, are subject to numerous laws and regulations designed to protect the environment. We believe that we have complied with these requirements and that such compliance has not had a material adverse effect on our business or financial condition.

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

Intellectual Property

Our ability to compete depends, in part, on our ability to obtain and enforce intellectual property protection for our technology in the United States and internationally. We rely upon a combination of trade secrets, trademarks, patents and contractual rights to protect our intellectual property. We presently have a total portfolio of twelve issued patents, and four pending patents which relate to technologies developed in connection with Eclipse. In addition, we enter into confidentiality and invention assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information.

While our ability to compete may be affected by our ability to protect our intellectual property, we believe that, because of the rapid pace of technological change in the wireless telecommunications industry, our innovative skills, technical expertise and ability to introduce new products on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property. Trade secret, trademark, copyright and patent protections are important but must be supported by other factors such as the expanding knowledge, ability and experience of our personnel, new product introductions and product enhancements. Although we continue to implement protective measures and intend to defend vigorously our intellectual property rights, there can be no assurance that these measures will be successful.

Raw Materials and Supplies

Because we outsource the majority of our manufacturing, we are dependent upon subcontractors to meet our performance requirements, quality specifications and delivery schedules. In some cases, we help our sub-contractors procure certain components in order to meet our delivery schedules. We provide our suppliers with monthly forecasts for up to six months so they can secure long-lead parts in order to be able to meet the delivery schedules. We are generally obligated to pay for long-lead items purchased by our suppliers based on our forecasts. To date, while we have been impacted by financial and performance issues of some of our suppliers and subcontractors, we have not been materially adversely affected by the inability to obtain raw materials or products.

Employees

As of March 31, 2006, we employed 453 full-time, part-time and temporary employees. None of our employees are represented by a collective bargaining agreement. Our future performance will depend in large measure on our ability to attract and retain highly skilled employees. We have never experienced a work stoppage and believe our relationship with our employees is good.

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Forward Looking Statements

The statements contained in this Annual Report on Form 10-K concerning our future products, expenses, revenues, gross margins, liquidity and cash needs, as well as our plans and strategies, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. All statements, trend analyses and other information contained herein about the markets for our services and products and trends in revenue, as well as other statements identified by the use of forward-looking terminology, including “anticipate,” “believe,” “plan,” “estimate,” “expect,” “goal” and “intend”, or the negative of these terms or other similar expressions, constitute forward-looking statements. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. The forward looking statements in this Annual Report include, without limitation, statements regarding:

•  Our belief that the trend of increased spending in the wireless telecommunications industry will continue over the next two years;

•  Our expectation that the number of global wireless subscribers and minutes of use per subscriber will continue to increase significantly;

•  Our expectation that services such as third generation mobile and WiMax will continue to grow;

•  Our belief that as broadband access and telecommunications requirements grow, wireless systems will continue to be used as transmission systems to support a variety of existing and expanding communications networks and applications;

•  Our belief that Eclipse will make it easier for users to plan and deploy their networks;

•  Our belief that wireless systems will be used to address the connection requirements of several markets and applications, including the broadband access market, cellular applications, and private networks;

•  Our intention to leverage our customer base, longstanding presence in many countries and distribution channels to continue to sell existing and new products;

•  Our belief that we are well positioned to continue to address worldwide market opportunities for wireless infrastructure suppliers;

•  Our belief that Eclipse is a significant innovation that addresses customer needs;

•  Our belief that the highly configurable Eclipse platform will result in a lower total cost of ownership by providing users with the ability to adapt to changing conditions or increase network capacity with minimal cost and disruption;

•  Our belief that our sales personnel are highly trained to assist customers with selecting and configuring wireless systems suitable for the customer’s particular needs;

•  Our intention to continue our history of developing and introducing innovative products, enhancing our products, maintaining technological competitiveness and meeting customer requirements through internal development and acquisition;

•  Our intention to expand our presence in the mobile wireless market by exploiting market opportunities created by the growing number of global wireless subscribers, increasing global minutes of use and increasing data transmission;

•  Our intention to expand our fixed wireless and enterprise businesses through marketing and sales of our products Eclipse and Velox;

•  Our belief that a direct and continuing relationship with service providers is a competitive advantage in attracting new customers and satisfying existing ones;

•  Our intention to continue to focus significant resources on product development to maintain our competitiveness and to support our entry into new markets;

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•  Our belief that our ability to compete successfully will depend on a number of factors both within and outside our control, including price, quality, availability, customer service and support, breadth of product line, product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and our competitors, the ability of our customers to obtain financing and the uncertainty of regional socio- and geopolitical factors;

•  Our expectation to continue to experience declining average sales prices for our products;

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

•  Our belief that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet customer requirements is essential to our success;

•  Our belief that the new product development programs could result in new products and expansion of the Eclipse product line;

•  Our expectation that our research and development spending will be slightly higher in fiscal 2007 due to increases in salaries and related personnel expenses as well as modest increases in personnel employed in this area.;

•  Our belief that our subcontractors, as part of our outsourced manufacturing strategy, will continue to perform and deliver our products in a timely and satisfactory manner;

•  Our expectation that competition will increase;

•  Our belief that we have complied by governmental laws established to avoid interference among users of microwave frequencies and to permit interconnection of telecommunications equipment;

•  Our belief that we have complied with the export/import license requirements;

•  Our belief that we have complied with numerous laws and regulations designed to protect the environment and such compliance has not had a material adverse effect on our business or financial condition;

•  Our belief that while our ability to compete may be affected by our ability to protect our intellectual property, because of the rapid pace of technological change in the wireless telecommunications industry, our innovative skills, technical expertise and ability to introduce new products on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property;

•  Our belief that our relationship with our employees is good;

•  Our belief that any regulatory changes, which are affected by political, environmental, economic and technical factors, will not significantly impact our operations;

•  Our belief that the redevelopment of the Middle East region as a result of the war in Iraq has and may continue to provide sales opportunities;

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

•  Our anticipation that our available cash and cash equivalents at March 31, 2006, combined with anticipated receipts of outstanding accounts receivable and the available credit of $10.6 million under our $50 million credit facility, should be sufficient to meet our anticipated needs for working capital and capital expenditures through March 31, 2007;

•  Our expectation that the telecommunications industry will continue to experience consolidation among its participants;

•  Our intent to consider opportunities to raise additional capital through a public or private equity offering and debt financing;

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•  Our belief that our facilities are adequate to meet our anticipated needs for the foreseeable future; and

•  Our belief that we will achieve cost reductions and distribution efficiencies through an indirect sales model in Latin and South America.

These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied in such forward looking statements. For a discussion of these risks and uncertainties as well as risks relating to our business in general, see the discussion below under the heading “Risk Factors.”

Item 1A.   Risk Factors

Our Company is subject to a number of risks that could affect our future financial results. Some of these risks are discussed below. (See also “Critical accounting policies and estimates” beginning on page 3,” and “Factors That May Affect Future Financial Results,” beginning on page 19 in our 2006 Annual Report to Stockholders).” Readers and prospective investors in our securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report.

The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.

If any of these risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s securities could decline significantly, and you could lose all or part of your investment.

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

We have incurred losses in many of our fiscal years since inception. For the last four fiscal years we have continuously incurred losses. In fiscal 2006, we incurred a loss of $2.3 million. As of March 31, 2006 we have an accumulated deficit of $416.0 million. We may not sustain profitability on a quarterly or annual basis.

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

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

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

We believe that our ability to compete successfully will depend on a number of factors both within and outside our control, including price, quality, availability, customer service and support, breadth of product line, product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and our competitors, the ability of our customers to obtain financing, and uncertainty of

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regional socio- and geopolitical factors. We cannot give assurances that we will have the financial resources, technical expertise, or marketing, sales, distribution, customer service and support capabilities to compete successfully.

Our average sales prices are declining.

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

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

In January 2004, we began commercial shipments of our product Eclipse. Eclipse is a wireless platform consisting of an Intelligent Node Unit and Outdoor Units. The platform utilizes a nodal architecture and combines multiplexing, routing and cross-connection functions with low to high capacity wireless transmission into a single system. To a large extent, our future profitability depends on the continued success and price competitiveness of Eclipse. We began to market the Eclipse product in 2003 and recorded our first sales in January 2004. In fiscal 2005, we recorded $39.6 million of revenue from sales of Eclipse products. In fiscal 2006, we recorded $134.5 million of revenue from sales of Eclipse products. Because Eclipse represents a new innovative solution for wireless carriers, we cannot give assurances that we will be able to continue to successfully market this product. If Eclipse does not achieve market acceptance to the extent expected by us, we may not be able to recoup the significant amount of research and development expenses associated with the development and introduction of this product and our business could be negatively impacted. Should the continued ramp up of the Eclipse product be unsuccessful, there would be a material adverse effect on our business, financial condition and results of operations.

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

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

	Years Ended March 31,
	2006			2005
Number of significant customers		1			1
Percentage of net sales		10	%		21	%

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

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We may be subject to litigation regarding intellectual property associated with our wireless business and this could be costly to defend and resolve, and could prevent us from using or selling the challenged technology.

The wireless telecommunications industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Such litigation or claims could result in substantial costs and diversion of resources. In the event of an adverse result of any such litigation, we could be required to pay substantial damages, cease the licensing of allegedly infringing technology or the sale of allegedly infringing products and expend significant resources to develop non-infringing technology or obtain licenses for the infringing technology. We cannot give assurances that we would be successful in developing such non-infringing technology or that any license for the infringing technology would be available to us on commercially reasonable terms, if at all. This could have a material and adverse effect on our business, results of operation, financial condition, competitive position and prospects.

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

We are highly dependent on sales to customers outside the United States. In fiscal 2006 sales to international customers accounted for 95% of the total net sales. During fiscal 2005 and 2004, sales to international customers accounted for 94% and 96% of our net sales, respectively. In fiscal 2006, 2005 and 2004, sales to the Middle East/Africa region accounted for approximately 28%, 25% and 33% of our net sales, respectively. Also, significant portions of our international sales are in lesser developed countries. We expect that international sales will continue to account for the majority of our net product sales for the foreseeable future. As a result, the occurrence of any international, political, economic or geographic event that adversely affects our business could result in significant revenue shortfalls. These revenue shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks and challenges of doing business internationally include:

•  unexpected changes in regulatory requirements;

•  fluctuations in foreign currency exchange rates;

•  imposition of tariffs and other barriers and restrictions;

•  management and operation of an enterprise spread over various countries;

•  burden of complying with a variety of foreign laws and regulations;

•  general economic and geopolitical conditions, including inflation and trade relationships;

•  war and acts of terrorism;

•  natural disasters;

•  currency exchange controls; and

•  changes in export regulations.

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

Although a majority of sales are through our direct sales force, we also market our products through indirect sales channels such as independent agents, distributors, and telecommunication integrators. In addition, we recently entered into a licensing agreement with Alcatel, whereby Alcatel private labels a portion of our Eclipse product line and pays us a license fee based on the value of equipment purchased from our subcontract manufacturers. These relationships enhance our ability to pursue the limited number of major contract awards each year and, in some cases, are intended to provide our customers with easier access to financing and to integrated systems providers with a variety of equipment and service capabilities. We may not be able to continue to maintain and develop additional

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relationships or, if additional relationships are developed, they may not be successful. Our inability to establish or maintain these distribution and licensing relationships could restrict our ability to market our products and thereby result in significant reductions in revenue. If these revenue reductions occur, our business, financial condition and results of operations would be harmed.

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

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

The inability of our subcontractors to perform, or our key suppliers to manufacture and deliver materials, could cause our products to be produced in an untimely or unsatisfactory manner, or not at all.

Our manufacturing operations, which have been substantially subcontracted, are highly dependent upon the delivery of materials by outside suppliers in a timely manner. Also, we depend in part upon subcontractors to assemble major components and subsystems used in our products in a timely and satisfactory manner. We do not generally enter into long-term or volume purchase agreements with any of our suppliers, and we cannot provide assurances that such materials, components and subsystems will be available to us at such time and in such quantities as we require, if at all. Our inability to develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and timely deliver our products to our customers. We cannot give assurances that we will not experience material supply problems or component or subsystem delays in the future. Also, our subcontractors may not be able to maintain the quality of our products, which might result in a large number of product returns by customers and could harm our business, financial condition and results of operations. The anticipated increase in volume due to the licensing agreement entered into with Alcatel could increase the risk of the inability of our subcontractors to manufacture and timely deliver our products to our customers.

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

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

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

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Our success depends on new product introductions and acceptance.

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

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

Our customers may not pay us in a timely manner, or at all, which would decrease our income and utilize our working capital.

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

	March 31,	March 31,
	2006	2005
Number of significant customers	2		—
Percentage of accounts receivable balance	12%, 10%		—

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

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

During fiscal 2005 and the fiscal 2006, we used a significant amount of cash. This use of cash was primarily because of an increase in working capital requirements and net losses from operations. We expect cash usage to increase due to an increase in working capital requirements. As a result of cash requirements, we may need significant additional financing, which we may seek to raise through, among other things, public and private equity offerings and debt financing. In May 2005, we entered into an amendment to the existing Credit Facility Agreement we had with a commercial bank which expanded the amount of credit available under the facility and extended it to April 2007. In the fourth quarter of fiscal 2006, we amended the Credit Facility Agreement again and increased the amount of our credit facility with the bank from $35 million to $50 million and extended the facility for an additional one year term to April 30, 2008. Per the amended agreement, the total amount of revolving credit available was expanded to $50 million less the outstanding balance of the term debt portion and any usage under the revolving credit portion. As of March 2006, the balance of the long-term debt portion of our credit facility was

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$33.5 million and there were $5.8 million outstanding standby letters of credit as of that date which are defined as usage under the revolving credit portion of the facility. There were no other outstanding balances under the short term debt portion of the facility as of March 31, 2006. As the long-term debt portion is repaid, additional credit will be available under the revolving credit portion of the facility. We currently anticipate that our available cash and cash equivalents at March 31, 2006, and the available credit under our $50 million credit facility as described above, should be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months.

However, if changes occur that would consume available capital resources significantly sooner than we expect, if there is any significant negative impact resulting from continued losses or poor collection performance, if we are unable to raise sufficient funds in the required time frame on commercially reasonable terms, or we are unable to liquidate other current assets, our working capital may not be sufficient to support our anticipated needs for working capital and capital expenditures through the next 12 months and we may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our operations.

We may breach our covenants relating to our outstanding debt against our $50 million revolving credit facility with a commercial bank resulting in a secured creditor claim action against us by the bank and the inability to obtain future borrowings.

In the first quarter of fiscal 2005, we borrowed $25 million on a long-term basis, against our $35 million revolving credit facility with a commercial bank. In the fourth quarter of fiscal 2006, we increased the amount of our credit facility with the bank from $35 million to $50 million and extended the facility for a further one year term to April 30, 2008. On March 1, 2006, we drew down an additional $20 million on a four year term basis under the facility. As part of the credit facility agreement, we have to maintain, as measured at the last day of each fiscal quarter, tangible net worth of at least $54 million plus (1) 25% of net income, as determined in accordance with GAAP (exclusive of losses) and (2) 50% of any increase to net worth due to subordinated debt or net equity proceeds from either public or private offerings (exclusive of issuances of stock under our employee benefit plans) for such quarter and all preceding quarters since December 31, 2005. We also have to maintain, as measured at the last day of each fiscal month, a ratio of (1) total unrestricted cash and cash equivalents plus short-term and long-term marketable securities plus 25% of all accounts receivable due to us minus certain outstanding bank services and reserve for foreign currency contract transactions divided by (2) the aggregate amount of outstanding borrowings and other obligations to the bank, of not less than 1.00 to 1.00 for each month end through May 31, 2006 and 1.25 to 1.00 thereafter. As of March 31, 2006 we were in compliance with these financial covenants of the loan. We may be in breach of these covenants in future quarters which will make the outstanding debt due to the bank immediately. We may not have the cash to pay off the outstanding debt immediately, resulting in a secured creditor legal action against us. Also, if we breach the agreement, we will no longer be able to borrow under the agreement. Any such breach will likely affect our credit rating and make it less likely that other lenders will be willing to lend to us.

Negative changes in the capital markets available for telecommunications and mobile cellular projects may result in reduced revenues and excess inventory, that we cannot sell or may be required to sell at distressed prices, and may result in longer credit terms to our customers.

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

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

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

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

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

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

•  volume and timing of product orders received and delivered during the quarter;

•  our ability and the ability of our key suppliers to respond to changes on demand as needed;

•  suppliers inability to perform and timely deliver as a result of their financial condition, component shortages or other supply chain constraints;

•  continued market expansion through strategic alliances;

•  continued timely rollout of Eclipse functionality and features;

•  increased competition resulting in downward pressures on the price of the Company’s products and services;

•  unexpected delays in the schedule for shipments of Eclipse and new generations of the Eclipse platform;

•  failure to realize expected cost improvement throughout the Company’s supply chain;

•  order cancellations or postponements in product deliveries resulting in delayed revenue recognition.

•  war and acts of terrorism;

•  natural disasters;

•  ability of our customers to obtain financing to enable their purchase of our products;

•  fluctuations in foreign currency exchange rates;

•  regulatory developments including denial of export and import licenses; and

•  general economic conditions worldwide.

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

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Acts of terrorism can negatively impact revenues.

The U.S. war in Iraq and the general socio- and geopolitical conditions in the Middle East, have negatively impacted, and may continue to negatively impact, the economy in general. This could impact our current and future business in the Middle East and could result in our customers delaying or canceling the purchase of our products, which would have a significant negative impact on our revenues. However, the redevelopment of these regions has provided us with sales opportunities recently and may continue to provide sales opportunities in future periods.

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

Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of our key personnel and executive officers, including Tom Waechter, who currently serves as our President and Chief Executive Officer, and Charles D. Kissner, who currently serves as our Executive Chairman. The loss of any key personnel could harm our business. Our prospects depend upon our ability to attract and retain qualified engineering, manufacturing, marketing, sales and management personnel for our operations. Competition for personnel is intense and we may not be successful in attracting or retaining qualified personnel. The failure of any key employee to perform in his or her current position or our inability to attract and retain qualified personnel could harm our business and deter our ability to expand.

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

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

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

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

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

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allocation of radio frequency spectrum by the appropriate governmental authority or obtain the proper regulatory approval for our products, our business, financial condition and results of operations may be harmed.

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

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

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

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the telecommunications industry in which we compete, or the economies of the countries in which we do business and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could lower the market price of our common stock. Our stock is currently listed on the Nasdaq National Market. If our bid price were to remain below $1.00 for 30 consecutive business days, Nasdaq could notify us of our failure to meet the continued listing standards, after which we would have 180 calendar days to correct such failure or be delisted .

Changes in Accounting Standards for Share-Based Payments will reduce our future profitability.

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (SFAS 123(R)), we will be required to recognize, beginning in our first quarter of fiscal 2007, compensation expense in our statement of operations for the fair value of unvested employee stock options at the date of adoption, and new stock options granted to our employees after the adoption date, over the related vesting periods of the stock options. The requirement to expense stock options granted to employees reduces the attractiveness of granting stock options because the expense associated with these grants may adversely affect our profitability. However, stock options remain an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program following the adoption of SFAS 123(R). We may decide to replace our stock option programs with other compensation arrangements, but those are also likely to negatively impact profitability. Our employees are critical to our ability to develop and design systems that advance our productivity and competitive technology, increase our sales and provide support to customers. Accordingly, as a result of the requirement under SFAS 123(R) to recognize the fair value of stock based compensation as compensation expense, beginning in the first quarter of fiscal 2007, our future profitability will be reduced.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our operating results could be misstated, our reputation may be harmed and the trading price of our stock could be negatively impacted. As described in Management’s Annual Report for fiscal year 2005 on Internal Control Over Financial Reporting, the Company determined that two significant deficiencies in the Company’s internal control over financial reporting were considered to be “material weaknesses” as defined in standards established by the Public Company Accounting Oversight Board (“PCAOB”). In general, a “material weakness” (as defined in PCAOB Auditing Standard No. 2) is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement in

19

the annual or interim financial statements will not be prevented or detected. In fiscal 2006, we devoted significant resources to remediate and improve our internal controls related to these material weaknesses. We believe that these efforts have remediated the concerns that gave rise to the “material weakness” related to revenue recognition. However, due to the assessment of our internal controls over financial reporting as of March 31, 2006, we have identified the continuation of a material weakness in the review of the financial statements of foreign operations and the period-end financial close and reporting process for the Company’s consolidated operations. We will continue reviewing our internal controls over the financial close and reporting process, and will implement additional controls as needed. However, we cannot be certain that our controls over our financial processes and reporting will be adequate in the future. Any failure to adequately maintain internal controls over financial reporting could cause us prepare inaccurate financial statements, subject us to a misappropriation of assets or cause us to fail to meet our reporting obligations.

Item 1B.   Unresolved Staff Comments.

There are no unresolved staff comments as of the date of this report.

Item 2.   Properties

Our corporate offices and principal research and development facilities are located in San Jose, California in one leased building of approximately 60,000 square feet. We have vacated two other buildings in San Jose of approximately 73,000 square feet; however, we have ongoing lease commitments for these buildings. We also lease two buildings in Milpitas, California totaling 60,000 square feet. One of these buildings is used for warehousing. We have vacated the other building of approximately 28,000 square feet. We have an ongoing lease commitment for the vacated building. In the vacated building, we have sub-tenants occupying the majority of the building. Although we have discontinued our Seattle, Washington operations, we have ongoing lease commitments at the facility, which consists of two leased buildings aggregating approximately 101,000 square feet of office and manufacturing space.

We also own a 44,000 square foot service and repair facility in Hamilton, Scotland. We own an additional 58,000 square feet of office and manufacturing space in Wellington, New Zealand. Additionally, we lease an aggregate of approximately 32,000 square feet worldwide for sales, customer service and support offices. We believe these facilities are adequate to meet our anticipated needs for the foreseeable future.

Item 3.   Legal Proceedings

There are no material existing or pending legal proceedings against us. We are subject to legal proceedings and claims that arise in the normal course of our business.

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

None.

PART II

Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The section labeled “Quarterly Financial Data and Stock Information” appearing in our 2006 Annual Report to Stockholders is incorporated herein by reference.

Item 6.   Selected Financial Data

The section labeled “Selected Consolidated Financial Data” appearing in our 2006 Annual Report to Stockholders is incorporated herein by reference.

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

The information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Annual Report to Stockholders is incorporated herein by reference.

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

The information appearing under the caption “Quantitative and Qualitative Disclosures About Market Risk” in our 2006 Annual Report to Stockholders is incorporated herein by reference.

Item 8.   Financial Statements and Supplementary Data

The consolidated financial statements and supplementary data, and related notes and Reports of Independent Registered Public Accounting Firm regarding our consolidated financial statements, related notes appearing in our 2006 Annual Report to Stockholders are incorporated herein by reference.

Item 9.   Changes in and Disagreements with Independent Auditor on Accounting and Financial Disclosure

None

Item 9A.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, and because of the material weaknesses in our internal control over financial reporting described below, our management, including our CEO and CFO, has concluded that, as of March 31, 2006, our disclosure controls and procedures were ineffective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

In light of the material weaknesses noted below, the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, the Company believes that the accompanying financial statements fairly present the financial condition and results of operation for the fiscal years presented in the Annual Report on Form 10-K, and the Company has received an unqualified audit report from Deloitte & Touche LLP on the consolidated financial statements.

Management’s Report on Internal Control over Financial Reporting

Our management, with the participation of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal controls are designed to provide reasonable assurance to our management and members of our Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP).

Our management performed an assessment of our internal controls over financial reporting as of March 31, 2005 and identified the following two material weaknesses in internal control over financial reporting existing as of March 31, 2005. For the March 31, 2005 reporting period, management concluded that the Company 1) did not maintain effective controls over the determination of revenue recognition for a non-routine complex revenue transaction and 2) did not have enough review procedures on the financial closing and reporting process. Management believes that in fiscal 2006 we have remediated the weakness related to revenue recognition due to the expansion of internal review and clarification of internal policies which have been distributed to finance personnel worldwide. With respect to the weakness related to inadequate review of the financial statements of the

21

foreign operations and the period-end financial closing and reporting process for the Company’s consolidated operations, we have identified, developed and began to implement a number of measures to strengthen our internal control in this area. These measures included: hiring additional finance personnel, expanding financial statement reviews, establishing internal audit with a focus on the adequacy of internal controls over financial reporting and expanding the review of manual journal entries.

However, as a result of our assessment of our financial controls over financial reporting as of March 31, 2006, we have concluded that we have not remediated the material weakness in internal controls over the review of the financial statements of the foreign operations and the period-end financial closing and reporting process for the Company’s consolidated operations. We are taking further steps in fiscal 2007, including the increasing of staff in corporate finance, adding finance staffing at several foreign subsidiaries and expanded subsidiary financial reporting with a goal of having this material weakness remediated by the third quarter of fiscal 2007. We will continue reviewing our internal controls over the financial close and reporting process, and will implement additional controls as needed.

Deloitte & Touche LLP, an independent registered public accounting firm, has issued a report on management’s assessment of our internal control over financial reporting. That report appears below.

Changes in Internal Control over Financial Reporting

In connection with our implementation of the provisions of Section 404 of Sarbanes-Oxley of 2002, we have made and will continue to make various improvements to our system of internal controls. We continue to review, revise and improve the effectiveness of our internal controls. To improve the effectiveness of the Company’s internal controls and address the material weaknesses referred to in the previous section under the caption “Management’s Report on Internal Control over Financial Reporting”, we hired an internal audit manager in the first quarter of fiscal 2006, a new controller in the fourth quarter of fiscal 2006, a finance manager at our subsidiary in France in the fourth quarter of fiscal 2006 and finance managers to oversee the finance functions of our Poland and South America operations in the first quarter of fiscal 2007. In addition, we have implemented an expanded policy related to revenue recognition and we are in the process of recruiting an additional accountant to the Corporate staff to assist in the consolidation and review process. With the staff additions, we will further revise our financial review procedures. Other than as described above, there has been no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected or is likely to materially affect our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including Stratex’s, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct, including fraud, completely. Accordingly, any system of internal control over financial reporting, including Stratex’s, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Stratex Networks, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Stratex Networks, Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of March 31, 2006, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s

22

management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The material weakness described in the following paragraph has been identified and included in management’s assessment:

The Company’s controls over the review of the financial statements of the foreign operations and the period-end financial closing and reporting process for the Company’s consolidated operations are inadequate and constitute a material weakness in the design of internal control over financial reporting. Specifically, the Company lacks sufficient resources with the appropriate level of technical accounting expertise within the accounting function and therefore was unable to accurately perform certain of the designed controls over the March 31, 2006 financial closing and reporting process, evidenced by a significant number of adjustments which were necessary to present the financial statements for the year ended March 31, 2006 in accordance with generally accepted accounting principles. Based on the misstatements identified and the significance of the financial closing and reporting process to the preparation of reliable financial statements, there is a more than remote likelihood that a material misstatement of the interim and annual financial statements would not have been prevented or detected.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2006 of the Company and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway

23

Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2006 of the Company and our report dated June 14, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/  DELOITTE & TOUCHE LLP

San Jose, California

June 14, 2006

Item 9B.   Other Information

None

PART III

Item 10.   Directors and Executive Officers of the Registrant

The information regarding Directors and Executive Officers appearing under the headings “Executive Officers” and “Proposal 1: Election of Directors” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on August 15, 2006 is incorporated herein by reference. The information under the heading “Compliance with Section 16(a) of the Securities Exchange Act of 1934” of our 2006 Proxy Statement is also incorporated by reference in this section. In addition, the information included under the heading “Corporate Governance Principles and Board Matters” of our 2006 Proxy Statement, identifying the financial expert who serves on the Audit Committee of our Board of Directors is incorporated by reference in this section.

On November 11, 2003, the Company adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions. A copy of the Code of Ethics is filed with the Securities and Exchange Commission as an exhibit to the Company’s annual report on Form 10-K for the year ended March 31, 2004 and has been posted on the Company’s website at www.stratexnet.com. To the extent required by law, any amendments to, or waivers from, any provision of the code of ethics will promptly be disclosed to the public. To the extent permitted by such legal requirements, the Company intends to make such public disclosure by posting the relevant material on our website in accordance with SEC rules.

Item 11.   Executive Compensation

The section entitled “Compensation of Directors and Executive Officers,” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on August 15, 2006 is incorporated herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The section entitled “Security Ownership of Certain Beneficial Owners and Management” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on August 15, 2006 is incorporated herein by reference.

In response to the SEC’s Release No. 33-8048, the following information is being provided:

Securities Authorized for Issuance Under Equity Compensation Plans

24

	(a)		(b)		(c)
					Number of
	Number of				Securities
	Securities to be				Remaining Available
	Issued Upon		Weighted-Average		for Future Issuance
	Exercise of		Exercise Price of		Under Plans
	Outstanding		Outstanding		(Excluding
	Options, Warrants		Options, Warrants		Securities Listed
Plan Category	and Rights		and Rights		in Column (a))
Equity compensation plans approved by security holders		11,022,447	$	5.75		5,385,085
Equity compensation plans not approved by security holders		336,359	$	5.46		377,493
Total		11,358,806	$	5.74		5,762,578

The equity compensation plans not approved by the security holders include the 1996 and 1998 Plans. The 1996 Plan authorizes 1,000,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with us. The 1996 Plan will terminate on the date on which all shares available have been issued. The 1998 Non-Officer Employee Stock Option Plan (the “1998 Plan”) became effective on January 2, 1998 and authorizes 500,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with us. The 1998 Plan will terminate on the date on which all shares available have been issued.

Item 13.   Certain Relationships and Related Transactions

The section entitled “Certain Transactions” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on August 15, 2006 is incorporated herein by reference.

Item 14.   Principal Accounting Fees and Services

For information required by Item 14 with respect to principal accounting fees and services, see the information set forth under the caption “Audit and Non-Audit Fees Billed to the Company by Deloitte & Touche LLP for the Fiscal Year Ended March 31, 2006” in the definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on August 15, 2006 which information is incorporated by reference into this Form 10-K.

PART IV

Item 15.   Exhibits, Financial Statement Schedule.

(a) The following documents have been filed as a part of this Annual Report on Form 10-K.

     1.   Index to Financial Statements

The following consolidated financial statements are contained in our 2006 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8:

(i) Consolidated Balance Sheets as of March 31, 2006 and 2005.

(ii) Consolidated Statements of Operations for each of the three years in the period ended March 31, 2006.

(iii) Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended March 31, 2006.

(iv) Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2006.

(v) Notes to Consolidated Financial Statements.

(vi) Report of Independent Registered Public Accounting Firm.

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     2.   Financial Statement Schedule

The following consolidated financial statement schedule for each of the three years in the period ended March 31, 2006 is submitted herewith:

Schedule II: Valuation and Qualifying Accounts and Reserves.

Report of Independent Registered Public Accounting Firm on Schedule.

Schedules not listed above have been omitted because they are not applicable or required, or information required to be set forth therein is included in the Consolidated Financial Statements, including the Notes thereto, incorporated herein by reference.

     3.   Exhibits

The exhibits listed on the Exhibit Index beginning on Page 32 hereof.

(b) See Item 15(a) 3 above

(c) See Item 15(a) 2 above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: June 14, 2006

STRATEX NETWORKS, INC.

By:  /s/  Thomas H. Waechter

Thomas H. Waechter

President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That the undersigned officers and directors of Stratex Networks, Inc. do hereby constitute and appoint Thomas H. Waechter and Carl A. Thomsen, and each of them, the lawful attorney and agent or attorneys and agents with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or either of them, deems to be necessary or advisable or required to enable Stratex Networks, Inc. to comply with the Securities Exchange Act of 1934, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Annual Report on Form 10-K. Without limiting the generality of the foregoing power and authority, the powers include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Form 10-K report or amendment or supplements thereto, and each of the undersigned hereby ratifies and confirms all that said attorneys and agents or either of them, shall do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his name.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures	Signing Capacity	Date
/s/  Thomas. H. Waechter Thomas. H. Waechter	President and Chief Executive Officer (Principal Executive Officer)	June 14, 2006
/s/  Carl A. Thomsen Carl A. Thomsen	Senior Vice President, Chief Financial Officer & Secretary (Principal Financial and Accounting Officer)	June 14, 2006
/s/  Charles D. Kissner Charles D. Kissner	Chairman of the Board of Directors	June 14, 2006

27

Signatures	Signing Capacity	Date
/s/  Richard C. Alberding Richard C. Alberding	Director	June 14, 2006
/s/  Edward F. Thompson Edward F. Thompson	Director	June 14, 2006
/s/  James D. Meindl James D. Meindl	Director	June 14, 2006
/s/  V. Frank Mendicino V. Frank Mendicino	Director	June 14, 2006
/s/  William A. Hasler William A. Hasler	Director	June 14, 2006
/s/  Clifford H. Higgerson Clifford H. Higgerson	Director	June 14, 2006

28

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Stratex Networks, Inc.

San Jose, California

We have audited the consolidated balance sheets of Stratex Networks, Inc. and subsidiaries as of March 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2006, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006, and the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006, and have issued our reports thereon dated June 14, 2006; such consolidated financial statements and reports are included in your 2006 Annual Report to Stockholders and are incorporated herein by reference. Our report on internal control over financial reporting dated June 14, 2006 expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/  DELOITTE & TOUCHE LLP

San Jose, California

June 14, 2006

29

Schedule II

Stratex Networks, Inc.

Valuation and Qualifying Accounts and Reserves

Allowance for Doubtful Accounts

	Balance at		Charged to Costs		Deductions/			Balance at
Description of Year	Beginning of Year		and Expenses		Write-off			End of Year
	(In thousands)
Year Ended March 31, 2006	$	2,769	$	548	$	(1,177	)	$	2,140
Year Ended March 31, 2005	$	2,373	$	1,067	$	(671	)	$	2,769
Year Ended March 31, 2004	$	6,395	$	33	$	(4,055	)	$	2,373

30

EXHIBIT INDEX

Exhibit
Number			Description
	2	.1	Certificate of Ownership and Merger merging DMC Stratex Networks, Inc. into Digital Microwave Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2000).
	3	.1	Second Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on May 07, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Annual report on For 10-K filed on May 27, 2004).
	3	.2	Amended and Restated Bylaws, amended as of May 18, 2006. (incorporated by reference to exhibit 99.1 filed on Form 8-K on May 18, 2006).
	4	.1	Form of Indenture (incorporated by reference to Exhibit 4.3 to the company’s registration statement filed on Form S-3 on November 28, 2000).
	4	.2	Form of Debt Warrant Agreement, including form of Debt Warrant Certificate (incorporated by reference to Exhibit 4.4 to the company’s Registration Statement filed on Form S-3 on November 28, 2000).
	4	.3	Form of Common Stock Warrant Agreement, including form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement filed on Form S-3 on November 28, 2000).
	4	.4	Form of Senior Debenture (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement filed on Form S-3 on November 28, 2000).
	4	.5	Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank dated January 21, 2003. (incorporated by reference to exhibit number 4.5 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).
	4	.6	Amended and Restated Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank, dated January 21, 2004 (incorporated by reference to exhibit 10.1 filed on Form 8-K on January 22, 2004).
	4	.7	Amendment No. 1 to the Restated Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank, dated May 04, 2005 (incorporated by reference to exhibit 4.7 filed on Form 10-K on June 14, 2005).
	4	.8	Amendment No. 2 to Amended and Restated Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank, dated August 15, 2005. (incorporated by reference to exhibit 4.1 filed on Form 10-Q on November 9, 2005).
	4	.9	Amendment No. 3 to Amended and Restated Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank, dated December 28, 2005. (incorporated by reference to exhibit 4.1 filed on Form 10-Q on February 9, 2006).
	4	.10	Amendment No. 4 to Amended and Restated Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank, dated February 27, 2006.
	10	.1**	Stratex Networks, Inc. 1984 Stock Option Plan, as amended and restated on June 11, 1991 (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1991).
	10	.2**	Form of Installment Incentive Stock Option Agreement (incorporated by reference to Exhibit 28.2 to the Company’s Registration Statement on Form S-8 (File No. 33-43155)).
	10	.3**	Form of Installment Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 28.3 to the Company’s Registration Statement on Form S-8 (File No. 33-43155)).
	10	.4**	Form of Indemnification Agreement between the Company and its directors and certain officers (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No. 33-13431)).
	10	.5**	Stratex Networks, Inc. 1994 Stock Incentive Plan, as amended and restated on May 1, 1996 (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on August 4, 1998).
	10	.6**	Stratex Networks, Inc. 1994 Stock Incentive Plan, as amended and restated on May 1, 1996 (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on August 4, 1998).

Exhibit
Number			Description
	10	.7	Stratex Networks, Inc. 1998 Non-Officer Employee Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No. 333-48535)).
	10	.8**	Restated Employment Agreement, dated as of May 14, 2002, by and between Stratex Networks, Inc. and Charles D. Kissner (incorporated by reference to exhibit number 10.7 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).
	10	.9	Stratex Networks, Inc. 1999 Non-Officer Employee Restricted Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the company’s Registration Statement on Form S-8 (File No. 333-76233)).
	10	.10	Stratex Networks, Inc. 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No. 333-80281)).
	10	.11**	Employment Agreement dated as of May 14, 2002, by and between the Company and Carl A. Thomsen. (incorporated by reference to exhibit number 10.10 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).
	10	.12**	Form of Employment Agreement dated as of May 14, 2002, by and between the Company and John C. Brandt, Carol A. Goudey, Paul Kennard, Shaun McFall, Ryan Panos, Robert Schlaefli, Timothy Hansen and John P. O’Neil (incorporated by reference to exhibit number 10.11 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).
	10	.13	Lease, dated February 16, 2000, by and between Corporate Technology Centre Associates II LLC and Stratex Networks, Inc., relating to 130 Rose Orchard Way, San Jose, California (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000).
	10	.14	Lease, dated February 16, 2000, by and between Corporate Technology Centre Associates II LLC and Stratex Networks, Inc., relating to 170 Rose Orchard Way, San Jose, California (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000).
	10	.15	Lease, dated February 16, 2000, by and between Corporate Technology Centre Associates II LLC and Stratex Networks, Inc., relating to 180 Rose Orchard Way, San Jose, California (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000).
	10	.16**	DMC Stratex Networks, Inc. 2002 Stock Incentive Plan (incorporated by reference to exhibit number 10.15 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).
	10	.17	Placement Agency Agreement between Stratex Networks, Inc., and CIBC World Markets Corp., dated September 20, 2004. (incorporated by reference to exhibit number 10.1 filed on Form 8-K on September 24, 2004).
	10	.18**	Employment Agreement, dated as of May 16, 2006, by and between Stratex Networks, Inc. and Thomas H. Waechter.
	10	.19**	Employment agreement dated April 1, 2006 by and between Stratex Networks, Inc. and John Brandt.
	10	.20**	Amendment A to April 1, 2006 Employment agreement between Stratex Networks, Inc. and John Brandt, dated April 19, 2006.
	13	.1	Portions of the 2006 Annual Report to Stockholders.
	14	.1	Code of Ethics adopted by the Company on November 11, 2003. (incorporated by reference to exhibit number 14.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2004)
	21	.1	List of subsidiaries.
	23	.1	Consent of Independent Registered Public Accounting Firm .

Exhibit
Number			Description
	24	.1	Power of Attorney (included in signature page in this Annual Report on Form 10-K).
	31	.1	Certification of Thomas H. Waechter, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Carl A. Thomsen, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1	Certification of Thomas H. Waechter, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Carl A. Thomsen, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** Management contract, compensatory plan or arrangement in which one or more of our directors or executive officer(s) participates.

EX-4.10

Exhibit 4.10

AMENDMENT NO. 4
TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

     This Amendment No. 4 to Amended and Restated Loan and Security Agreement (this “Amendment”) is entered into this 27th day of February, 2006, by and between Stratex Networks, Inc., a Delaware corporation (“Borrower”), and Silicon Valley Bank (“Bank”). Capitalized terms used herein without definition shall have the same meanings given them in the Loan Agreement (as defined below).

Recitals

     A. Borrower and Bank have entered into that certain Amended and Restated Loan and Security Agreement dated as of January 21, 2004 (as amended, restated, modified and/or supplemented from time to time, the “Loan Agreement”), pursuant to which Bank agreed to extend and make available to Borrower certain advances of money.

     B. Subject to the representations and warranties of Borrower herein and upon the terms and conditions set forth in this Amendment, Bank is willing to amend the Loan Agreement as set forth herein.

Agreement

     NOW, THEREFORE, in consideration of the foregoing Recitals and intending to be legally bound, the parties hereto agree as follows:

     1. Amendments to Loan Agreement.

          1.1 Section 2.1.5 (Term Loan). Section 2.1.5(a) is hereby amended to read in its entirety as follows:

          (a) From the Closing Date through March 31, 2006, Bank shall make up to two (2) advances (each, a “Term Advance” and, collectively, “Term Advances”) in an aggregate amount not to exceed the Term Loan Amount; provided however, any Term Advances with a Funding Date after the effective date of Amendment No. 4 to this Agreement (a “Term B Advance”) shall not exceed $20,000,000 in the aggregate.

          1.2 Section 2.2 (Overadvances). Section 2.2 is hereby amended to read in its entirety as follows:

          If the Borrower’s aggregate obligations under (a) the Term Advances under Section 2.1.5 exceed twice the Borrowing Base, or (b) Sections 2.1.1, 2.1.2, and 2.1.4 plus the FX Reserve under Section 2.1.3 and Term Advances under Section 2.1.5 exceed $50,000,000, then, in either case, Borrower must immediately pay Bank the excess.

          1.3 Section 2.3 (General Provisions Relating to the Advances and Term Advances). Section 2.3(b) is hereby amended to read in its entirety as follows:

          (b) Each Term Advance shall, at Borrower’s option in accordance with the terms of this Agreement, be either in the form of a Fixed Rate Advance or a Floating Rate

Advance; provided however, any Term B Advance shall bear interest at the fixed rate set forth in Section 3.7(c). Borrower shall pay interest accrued on the Term Advances at the rates and in the manner set forth in Section 2.6(a).

          1.4 Section 3.7 (Calculation of Interest and Fees). Section 3.7(c) is hereby amended to read in its entirety as follows:

          (c) Fixed Rate Advances. (1) Fixed Rate Advances with a Funding Date prior to February ___, 2006 accrue interest on the outstanding principal balance at a rate per annum equal to the 60-month Treasury Rate in effect on the Funding Date plus two and one-half percent (2.50%) and (2) Term B Advances accrue interest on the outstanding principal balance at a rate per annum equal to the 60-month Treasury Rate in effect on the Funding Date plus two and six-tenth of one percent (2.60%) ((1) and (2), each referred to as a “Fixed Rate”). Interest on each Fixed Rate Advance is payable monthly by debit to the Designated Deposit Account on each Term Advance Payment Date applicable to such Fixed Rate Advance.

          1.5 Section 6.7 (Financial Covenants). Section 6.7(a) is hereby amended to read in its entirety as follows:

          (a) Tangible Net Worth. As measured at the last day of each fiscal quarter of Borrower, Tangible Net Worth of at least $54,000,000 plus (i) twenty-five percent (25%) of net income, as determined in accordance with GAAP (exclusive of losses), and (ii) fifty percent (50%) of any increases to net worth due to Subordinated Debt or net equity proceeds from either private or public offerings (exclusive of issuance of stock under Borrower’s employee benefit plans) for such quarter and all preceding quarters since December 31, 2005.

          1.6 Section 6.7 (Financial Covenants). Section 6.7(b) is hereby amended to read in its entirety as follows:

          (b) “Liquidity Coverage. As measured at the last day of each fiscal month of Borrower, a ratio of (1) unrestricted cash and Cash Equivalents plus (i) short-term and long-term, marketable securities of Borrower, plus (ii) twenty-five percent (25%) of Accounts minus (iii) outstanding Cash Management Services, and minus (iv) the FX Reserve divided by (2) the aggregate amount of the Obligations, of not less than 1.00 to 1.00 as measured at the last day of each calendar month through May 31, 2006 and 1.25:1.00 thereafter.”

          1.7 Section 13 (Definitions). The definition of “Committed Revolving Line” is amended and restated in its entirety as follows:

          “Committed Revolving Line” is $50,000,000 minus the aggregate outstanding principal amount of all Term Advances.

          1.8 Section 13 (Definitions). The definition of “Revolving Maturity Date” is amended and restated in its entirety as follows:

          “Revolving Maturity Date” is April 30, 2008.

          1.9 Section 13 (Definitions). The definition of “Tangible Net Worth” is amended and restated in its entirety as follows:

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          “Tangible Net Worth” is, on any date, the Consolidated Total Assets of Borrower and its Subsidiaries minus (a) any amounts attributable to reserves not already deducted from assets; (b) restricted cash; and (c) Consolidated Total Liabilities.

          1.10 Section 13 (Definitions). A new definition of “Term B Advance” is inserted in its proper alphabetical order as follows:

          “Term B Advance” is defined in Section 2.1.5(a).

          1.11 Section 13 (Definitions). A new definition of “Term Loan Amount” is inserted in its proper alphabetical order as follows:

          “Term Loan Amount” is $34,583,333.

          1.12 Compliance Certificate. A new form of Compliance Certificate, attached hereto as Exhibit A, hereby replaces the existing form attached as Exhibit D to the Loan Agreement.

     2. Borrower’s Representations And Warranties. Borrower represents and warrants that:

               (a) immediately upon giving effect to this Amendment (i) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (ii) no Event of Default has occurred and is continuing;

               (b) Borrower has the corporate power and authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

               (c) the certificate of incorporation, bylaws and other organizational documents of Borrower delivered to Bank on the Closing Date remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

               (d) the execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, have been duly authorized by all necessary corporate action on the part of Borrower; and

               (e) this Amendment has been duly executed and delivered by the Borrower and is the binding obligation of Borrower, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

     3. Limitation. The amendments set forth in this Amendment shall be limited precisely as written and shall not be deemed (a) to be a waiver or modification of any other term or condition of the Loan Agreement or of any other instrument or agreement referred to therein

3

or to prejudice any right or remedy which Bank may now have or may have in the future under or in connection with the Loan Agreement or any instrument or agreement referred to therein; or (b) to be a consent to any future amendment or modification or waiver to any instrument or agreement the execution and delivery of which is consented to hereby, or to any waiver of any of the provisions thereof. Except as expressly amended hereby, the Loan Agreement shall continue in full force and effect.

     4. Effectiveness. This Amendment shall become effective upon the satisfaction of all the following conditions precedent:

          4.1 Amendment. Borrower and Bank shall have duly executed and delivered this Amendment to Bank.

          4.2 Consents and approvals. Bank shall have received necessary consent from Borrower’s shareholders (if required) and board of directors to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment.

          4.3 Good standing. Bank shall have received a good standing certificate of Borrower from the State of Delaware and a certificate of status/foreign corporation of Borrower from the State of California.

          4.4 Payment of Bank Expenses. Borrower shall have paid all Bank Expenses (including all reasonable attorneys’ fees and reasonable expenses) incurred and invoiced through the date of this Amendment.

          4.5 Amendment Fee. Borrower shall have paid Bank an amendment fee in an amount equal to $240,000.

     5. Counterparts. This Amendment may be signed in any number of counterparts, and by different parties hereto in separate counterparts, with the same effect as if the signatures to each such counterpart were upon a single instrument. All counterparts shall be deemed an original of this Amendment.

     6. Integration. This Amendment and any documents executed in connection herewith or pursuant hereto contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, oral or written, with respect thereto and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Amendment; except that any financing statements or other agreements or instruments filed by Bank with respect to Borrower shall remain in full force and effect.

     7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICT OF LAW.

[Signature page follows.]

4

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.

Borrower:	Stratex Networks, Inc.
	a Delaware corporation
	By:	ss//Carol A. Goudey
	Printed Name:	Carol A. Goudey
	Title:	Treasurer and Assistant Secretary
	By:	ss//Juan B. Otero
	Printed Name:	Juan B. Otero
	Title:	General Counsel and Assistant Secretary
Bank:	Silicon Valley Bank
	By:	ss//Tom Smith
	Printed Name:	Tom Smith
	Title:	Senior Relationship Manager

5

Exhibit A

COMPLIANCE CERTIFICATE

TO:	SILICON VALLEY BANK	Date:
	3003 Tasman Drive
	Santa Clara, CA 95054
FROM:	STRATEX NETWORKS, INC.

The undersigned Responsible Officer of Stratex Networks, Inc. (“Borrower”) certifies that under the terms and conditions of the Amended and Restated Loan and Security Agreement dated January 21, 2004, between Borrower and Bank (as amended, the “Agreement”), (i) Borrower is in complete compliance for the period ending                                          with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. In addition, the undersigned Responsible Officer certifies that Borrower (x) has complied with Section 6.4 of the Agreement with respect to payment of taxes of Borrower and its Subsidiaries and (y) does not have any legal actions pending or threatened against Borrower or any of its Subsidiaries which Borrower has not previously notified in writing to Bank pursuant to Section 6.2 of the Agreement. Attached are the required financial reports and calculation of financial covenants supporting the certification. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered.

Please indicate compliance status by circling Yes/No under “Complies” or “Occurrences” columns.

Reporting Covenant	Required	Complies
A/R and A/P agings	Monthly within 30 days	Yes	No
Form 10-Q + CC	Quarterly within 5 days of filing with SEC	Yes	No
Form 10-K + CC	Annually within 5 days of filing with SEC	Yes	No

		Occurrences*
IP Infringements	Prompt	Yes	No
Material Litigation	Prompt	Yes	No

Financial Covenant	Required	Actual	Complies
Minimum Tangible Net Worth (Quarterly)	54,000,000 plus (i) twenty-five percent (25%) of net income, as determined in accordance with GAAP (exclusive of losses), and (ii) fifty percent (50%) of any increases to net worth due to Subordinated Debt or net equity proceeds from either private or public offerings (exclusive of issuances of stock under Borrower’s employee benefit plans) for such quarter and all preceding quarters since December 31, 2005.	$	Yes	No
Minimum Liquidity Ratio (Monthly)	1.00:1.00 through May 30, 2006 and 1.25:1.00 thereafter	:1.00	Yes	No

* If yes, attached is a summary of the Material Litigation or IP Infringements not previously disclosed by Borrower.

Sincerely,

Stratex Networks, Inc.

By:

Name:

Title:

BANK USE ONLY

Received by:
	AUTHORIZED SIGNER

Date:

Verified:
	AUTHORIZED SIGNER

Date:

Compliance Status:                Yes      No

2

EX-10.18

Exhibit 10.18

Thomas H. Waechter
3052 Crestablanca Drive
Pleasanton, CA 94566

     Re: Employment Agreement

Dear Tom:

     I am very excited about the prospect of having you join Stratex Networks, Inc. (the “Company”). This letter agreement sets forth the terms of your employment with the Company, as well as our understanding with respect to any termination of that employment relationship. This Agreement will become effective on your first day of employment with the Company, which we anticipate will be May 16, 2006.

     1. Position and Duties. You will be employed by the Company as its President & Chief Executive Officer, reporting to the Company’s Board of Directors (the “Board”). This position will be based at our corporate headquarters in San Jose, California. You accept employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your full business time, energy and skill to your duties at the Company. Your primary responsibilities will be to assume the top leadership of the Company, direct the organization to ensure the attainment of revenue and profit goals, drive optimal return on invested capital, grow shareholder value, and accomplish other objectives as we have previously discussed.

     2. Term of Employment. Your employment with the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to the provisions of Paragraphs 4 and 5 below.

     3. Compensation. You will be compensated by the Company for your services as follows:

          (a) Salary: You will be paid a monthly base salary of $37,500.00 ($450,000 per year), less applicable withholding, in accordance with the Company’s normal payroll procedures. In conjunction with your annual performance review, which will occur at or about the start of each fiscal year (currently April 1), your base salary will be reviewed by the Board, and may be subject to adjustment based upon various factors including, but not limited to, your performance and the Company’s profitability. Any adjustment to your salary shall be made by the Board in its sole discretion.

1

Waechter
Employment Agreement

          (b) Incentive Plan: Subject to the Board’s approval of such a plan for Company employees, starting in FY2008, you will be eligible to participate in the Company’s annual Key Employee Incentive Plan (“KEIP”), with a target annual bonus of 80% of your annual base salary.

          (c) Restricted Stock Award: For FY2007, the Company will grant you a special, restricted stock award as an incentive to achieve growth and maintain profitability. You will receive the award of 85,096 shares (the “Restricted Stock”) on your date of hire. Removal of the restrictions on the Restricted Stock will be based on the Company’s achievement of specific financial goals; however, provided you remain employed by the Company through March 31, 2008, the restrictions on a minimum of one-half of the Restricted Stock will be removed. (That is, if the restrictions on less than 50% of the Restricted Stock have been removed by March 31, 2008, the restrictions will immediately be removed from additional shares sufficient to increase the percentage of the Restricted Stock that is unrestricted to 50%.) In the event that a Change of Control (as defined in Paragraph 6(a) below) occurs during FY2007, any remaining restrictions on the Restricted Stock will be removed upon the Change of Control. Your Restricted Stock award will be subject to the terms and conditions of the Company’s 2002 Stock Incentive Plan (the “Plan”), and to the terms and conditions of the Restricted Stock Agreement that you will be required to execute as a condition of receiving this award. I have attached an explanation of the Plan and summary of the financial goals that, if achieved, will result in the removal of restrictions on the Restricted Stock during each quarter of FY2007.

          (d) Stock Option: You will be granted a non-qualified stock option to purchase 450,000 shares of the Company’s common stock. This stock option grant will be effective on the date your employment begins, and, so long as you remain employed by the Company, the option will vest over four (4) years, with twenty-five percent (25%) of the option vesting on the first anniversary of the grant, and the remaining seventy-five percent (75%) of the option vesting in equal 1/36th increments on each monthly anniversary of the grant over the remaining three (3) years. Your stock option grant will be subject to the terms and conditions of the Plan, and to the terms and conditions of the stock option agreement that you will be required to execute as a condition of receiving this stock option.

          (e) Auto Allowance: The Company will provide you with an automobile allowance of $1,200.00 per month and will reimburse you for expenses of operating your automobile for the purposes of conducting Company business in accordance with the Company’s Travel and Entertainment Policy.

          (f) Benefits: You will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company group medical, dental, life, disability or other group insurance plans, as well as under the Company’s business expense reimbursement, educational assistance, holiday, and other benefit plans and policies. You will also be eligible to participate in the Company’s 401(k) plan.

          (g) Vacation: You will be credited with two weeks’ paid vacation on your first day of employment with the Company. Once your employment begins, you will also accrue paid vacation in accordance with the Company’s vacation policy, except that you shall accrue

2

Waechter
Employment Agreement

vacation at the rate of two (2) weeks per year during your first year of employment, and at the rate of four (4) weeks per year thereafter.

     4. Voluntary Termination. In the event that you voluntarily resign from your employment with the Company (other than for Good Reason as defined in Paragraphs 5(d) and 6(b)), or in the event that your employment terminates as a result of your death, you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. You agree that if you voluntarily terminate your employment with the Company for any reason, you will provide the Company with at least 10 business days’ written notice of your resignation. The Company shall have the option, in its sole discretion, to make your resignation effective at any time prior to the end of such notice period, provided the Company pays you an amount equal to the base salary you would have earned through the end of the notice period.

     5. Other Termination. Your employment may be terminated under the circumstances set forth below.

          (a) Termination by Disability. If, by reason of any physical or mental incapacity, you have been or will be prevented from performing your then-current duties under this Agreement for more than three consecutive months, then, to the extent permitted by law, the Company may terminate your employment without any advance notice. Upon such termination, if you sign a general release of known and unknown claims in a form satisfactory to the Company, the Company will provide you with the severance payments and benefits described in Paragraph 5(c). Nothing in this paragraph shall affect your rights under any applicable Company disability plan; provided, however, that your severance payments will be offset by any disability income payments received by you so that the total monthly severance and disability income payments during your severance period shall not exceed your then-current base salary.

          (b) Termination for Cause or Death: The Company may terminate your employment at any time for cause (as described below). If your employment is terminated by the Company for cause, or if your employment terminates as a result of your death, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. Provided, however, that if your employment terminates as a result of your death, the Company will pay your estate the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid at the time that such incentive bonuses are paid to other Company employees.

     For purposes of this Agreement, a termination “for cause” occurs if you are terminated for any of the following reasons: (i) theft, dishonesty, misconduct or falsification of any employment or Company records; (ii) improper disclosure of the Company’s confidential or proprietary information; (iii) any action by you which has a material detrimental effect on the Company’s reputation or business; (iv) your refusal or inability to perform any assigned duties (other than as a result of a disability) after written notice from the Company to you of, and a reasonable opportunity to cure, such failure or inability; or (v) your conviction (including any plea of guilty or no contest) for any criminal act that impairs your ability to perform your duties under this Agreement.

3

Waechter
Employment Agreement

          (c) Termination Without Cause: The Company may terminate your employment without cause at any time. If your employment is terminated by the Company without cause, and you sign a general release of known and unknown claims in a form satisfactory to the Company, and you fully comply with your obligations under Paragraphs 7, 8, and 10, you will receive the following severance benefits:

               (i) severance payments at your final base salary rate for a period of eighteen (18) months following your termination; such payments will be subject to applicable withholding and made in accordance with the Company’s normal payroll practices;

               (ii) payment of the premiums necessary to continue your group health insurance under COBRA (or to purchase other comparable health insurance coverage on an individual basis if you are no longer eligible for COBRA coverage) until the earlier of (x) eighteen (18) months following your termination date; or (y) the date you first became eligible to participate in another employer’s group health insurance plan; provided, however, that if you are 60 years of age or older on the date of your termination without cause, and if you have been employed by the Company for not less than three years as of the date of your termination without cause, the Company will pay the premiums necessary to continue your Company group health insurance coverage under COBRA (or to provide you with comparable health insurance coverage) until you reach the age of 65 or until you are eligible to participate in another employer’s group health insurance plan, whichever comes first;

               (iii) if your termination without cause occurs after March 31, 2007, the Company will pay you the prorated portion of any incentive bonus that you would have earned, if any, during the incentive bonus period in which your employment terminates (the pro-ration shall be equal to the percentage of that bonus period that you are actually employed by the Company), and such prorated bonus will be paid to you at the time that such incentive bonuses are paid to other Company employees; in addition, if less than 50% of the Restricted Stock has become unrestricted (based upon the Company’s FY2007 financial performance) as of your termination date, then the restrictions will immediately be removed from additional shares of Restricted Stock sufficient to increase the percentage of the Restricted Stock that is unrestricted to 50%;

               (iv) if your termination without cause occurs on or before March 31, 2007, the restrictions will be removed from a portion of the Restricted Stock equal to the pro-rated portion of the Restricted Stock that would have become vested (based upon the Company’s financial performance) at the end of the fiscal quarter in which your termination occurs (the pro-ration shall be equal to the percentage of that quarter that you are actually employed by the Company); if, after application of the preceding portion of this subsection (iv), the percentage of the Restricted Stock that is not subject to any restrictions (including any Restricted Stock that became unrestricted prior to your termination) is less than 25% times the percentage of FY2007 that you are actually employed by the Company (the resulting percentage being the “Minimum Percentage”), then the restrictions will immediately be removed from additional shares of Restricted Stock sufficient to increase the percentage of the Restricted Stock that is unrestricted to the Minimum Percentage (for purposes of determining any relevant pro-rations under this subparagraph (iv), your employment start date will be deemed to be April 1, 2006);

4

Waechter
Employment Agreement

               (v) with respect to any stock options granted to you by the Company, you will cease vesting upon your termination date; however, you will be entitled to purchase any vested shares of stock that are subject to those options until the earlier of (x) eighteen (18) months following your termination date, or (y) the date on which the applicable option(s) expire(s); except as set forth in this subparagraph, your Company stock options will continue to be subject to and governed by the Plan and the applicable stock option agreements between you and the Company;

               (vi) payment of your then-provided Company car allowance for the period described in subparagraph 5(c)(i);

               (vii) outplacement assistance selected and paid for by the Company; and

               (viii) Executive shall not be required to mitigate damages with respect to the severance payments and benefits described in subparagraphs (i) – (vii) by seeking employment or otherwise, and there shall be no offset against amounts due Executive under subparagraphs (i) – (vii) on account of his subsequent employment (except as provided in Paragraph 10).

          (d) Resignation for Good Reason: If you resign from your employment with the Company for Good Reason (as defined in this paragraph), and such resignation does not qualify as a Resignation for Good Reason Following a Change of Control as set forth in subparagraph (e) below, and you sign a general release of known and unknown claims in a form satisfactory to the Company, and you fully comply with your obligations under Paragraphs 7, 8, and 10, you shall receive the severance benefits described in Paragraph 5(c). For purposes of this Paragraph, “Good Reason” means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Chairman of the Board of said condition(s):

               (i) a reduction in your base salary of 20% or more, other than a reduction that is similarly applicable to a majority of the members of the Company’s executive staff; or

               (ii) a material reduction in your employee benefits, other than a reduction that is similarly applicable to a majority of the members of the Company’s executive staff; or

               (iii) a material reduction in your responsibilities or authority without your written consent; or

               (iv) a material breach by the Company of any material provision of this Agreement; or

               (v) the relocation of the Company’s workplace to a location that is more than 75 miles from the Company’s current workplace in San Jose.

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     The foregoing condition(s) shall not constitute “Good Reason” if you do not provide the Chairman of the Board with the written notice described above within 45 days after you first become aware of the condition(s).

          (e) Termination or Resignation For Good Reason Following a Change of Control: If, within 18 months following any Change of Control (as defined below), your employment is terminated by the Company without cause, or if you resign from your employment with the Company for Good Reason Following a Change of Control (as defined below), and you sign a general release of known and unknown claims in a form satisfactory to the Company, and you fully comply with your obligations under Paragraphs 7, 8, and 10, you shall receive the severance benefits described in Paragraph 5(c); provided, that the time periods set forth in subparagraphs 5(c)(i), (v)(x), and (vi) shall each be increased by an additional twelve (12) months. In addition, if such termination occurs after March 31, 2007, you shall receive a payment equal to the greater of (i) the average of the annual incentive bonus payments received by you, if any, for the previous three years, or (ii) your target incentive bonus for the year in which your employment terminates. (For purposes of subpart (i), the amount of your incentive bonus payment for FY2007 shall be deemed to be the dollar value that equals the percentage of the Restricted Stock that becomes unrestricted as a result of the Company’s achievement of its financial goals during FY2007 times $360,000.) Such payment will be made to you within 15 days following the date on which the general release of claims described above becomes effective. The Company will also accelerate the vesting of all unvested stock options granted to you by the Company such that all of your Company stock options will be fully vested as of the date of your termination/resignation.

     6. Change of Control/Good Reason.

          (a) For purposes of this Agreement, a “Change of Control” of the Company shall mean:

               (i) The direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept;

               (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors;

               (iii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

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               (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company’s subsidiary corporations);

               (v) the complete liquidation or dissolution of the Company;

               (vi) any reverse merger in which the Company is the surviving entity but in which securities possessing more than forty percent (40%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or

               (vii) the acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership ( within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than forty percent (40%) of the total combined voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator of the Plan determines shall not be a Corporate Transaction.

For the purposes of this Agreement, the terms “Continuing Directors,” “Corporate Transaction,” “Affiliate” and “Associate” shall have the meanings ascribed to such terms in the Plan.

          (b) For purposes of this Agreement, “Good Reason Following a Change of Control” means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Chairman of the Board of said condition(s):

               (i) a material and adverse change in your position, duties or responsibilities for the Company, as measured against your position, duties or responsibilities immediately prior to the Change of Control; for purposes of this agreement, an assignment to the position of Chief Executive Officer or Chief Operating Officer of a new entity shall not be considered a material and adverse change in your position, duties or responsibilities; or

               (ii) a reduction in your base salary as measured against your base salary immediately prior to the Change in Control; or

               (iii) a material reduction in your employee benefits, other than a reduction that is similarly applicable to a majority of the members of the Company’s executive staff; or

               (iv) the relocation of the Company’s workplace to a location that is more than 75 miles from the Company’s current workplace in San Jose.

The foregoing condition(s) shall not constitute “Good Reason Following a Change of Control” if you do not provide the Chairman of the Board with the written notice described above within 45 days after you first become aware of the condition(s).

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Employment Agreement

     7. Confidential and Proprietary Information: As a condition of your employment, you agree to sign and abide by the Company’s standard form of employee proprietary information/confidentiality/assignment of inventions agreement.

     8. Termination Obligations.

          (a) You agree that all property, including, without limitation, all equipment, proprietary information, documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by you in the course of or incident to your employment, belongs to the Company and shall be returned to the Company promptly upon any termination of your employment.

          (b) Upon your termination for any reason, and as a condition of your receipt of any severance benefits hereunder, you will promptly resign in writing from all offices and directorships then held with the Company or any affiliate of the Company.

          (c) Following the termination of your employment with the Company for any reason, you shall fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company. You shall also cooperate in the defense of any action brought by any third party against the Company.

     9. Limitation of Payments and Benefits.

          To the extent that any of the payments and benefits provided for in this Agreement or otherwise payable to you (the “Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the amount of such Payments shall be either:

          (a) the full amount of the Payments, or

          (b) a reduced amount that would result in no portion of the Payments being subject to the excise tax imposed pursuant to Section 4999 of the Code (the “Excise Tax”),

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by you, on an after-tax basis, of the greatest amount of benefit. In the event that any Excise Tax is imposed on the Payments, you will be fully responsible for the payment of any and all Excise Tax, and the Company will not be obligated to pay all or any portion of any Excise Tax.

     10. Other Activities. In order to protect the Company’s valuable proprietary information, you agree that during your employment and for a period of eighteen (18) months following the termination of your employment with the Company for any reason, you will not, as a compensated or uncompensated officer, director, consultant, advisor, partner, joint venturer, investor, independent contractor, employee or otherwise, provide any labor, services, advice or assistance to any entity or its successor, which is a direct competitor of the Company (and specifically identified as such in the Company’s Form 10K), unless specifically permitted to do

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so in writing by the Company or its successor. You acknowledge and agree that the restrictions contained in the preceding sentence are reasonable and necessary, as there is a significant risk that your provision of labor, services, advice or assistance to any of those competitors could result in the disclosure of the Company’s proprietary information. You further acknowledge and agree that the restrictions contained in this paragraph will not preclude you from engaging in any trade, business or profession that you are qualified to engage in. In the event of your breach of this Paragraph, the Company shall not be obligated to provide you with any further severance payments or benefits subsequent to such breach.

     11. Dispute Resolution. The parties agree that any suit, action, or proceeding arising out of or relating to this Agreement, the parties’ employment relationship, or the termination of that relationship for any reason, shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of Santa Clara) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection they may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Paragraph 11 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

     12. Compliance With Section 409A. Notwithstanding any inconsistent provision of this Agreement, to the extent the Company determines in good faith that (a) one or more of the payments or benefits you would receive pursuant to this Agreement in connection with your termination of employment would constitute deferred compensation subject to the rules of Section 409A of the Code, and (b) you are a “specified employee” under Section 409A, then only to the extent required to avoid your incurrence of any additional tax or interest under Section 409A of the Code, such payment or benefit will be delayed until the date which is six (6) months after your “separation from service” within the meaning of Section 409A. Any payments or benefits that would have been payable but are delayed under the previous sentence shall be payable at that time. You and the Company agree to negotiate in good faith to reform any provisions of this Agreement to maintain to the maximum extent practicable the original intent of the applicable provisions without violating the provisions of Section 409A of the Code, if the Company deems such reformation necessary or advisable in order to avoid the incurrence of any such additional tax, interest and/or penalties under Section 409A. Such reformation shall not result in a reduction of the aggregate amount of payments or benefits provided to you under this Agreement.

     13. Severability. If any provision of this Agreement is deemed invalid, illegal or unenforceable, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected.

     14. Applicable Withholding. All salary, bonus, severance and other payments identified in this Agreement are subject to applicable withholding by the Company.

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     15. Assignment. In view of the personal nature of the services to be performed under this Agreement by you, you cannot assign or transfer any of your obligations under this Agreement.

     16. Entire Agreement. This Agreement and the agreements referred to above constitute the entire agreement between you and the Company regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral. This Agreement sets forth our entire agreement regarding the Company’s obligation to provide you with severance benefits upon any termination of your employment, and you shall not be entitled to receive any other severance benefits from the Company pursuant to any Company severance plan, policy or practice.

     17. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California.

     18. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized representative of the Board.

     Tom, we look forward to having you join us at Stratex Networks, Inc. Please sign and date this letter on the spaces provided below to acknowledge your acceptance of the terms of this Agreement.

Sincerely,

Stratex Networks, Inc.

By:	/s/ Charles D. Kissner
	Charles D. Kissner
	Chairman of the Board

     I agree to and accept employment with Stratex Networks, Inc. on the terms and conditions set forth in this Agreement.

Date:	May 18	, 2006	/s/ Thomas H. Waechter
			Thomas H. Waechter

10

EX-10.19

Exhibit 10.19

 
John Brandt
120 Rose Orchard Way
San Jose, CA 95134

Re: Employment Agreement

Dear John,

     This letter sets forth the terms of your continued employment with Stratex Networks, Inc. (the “Company”) as well as our understanding with respect to any termination of that employment relationship. This Agreement is effective as of April 1, 2006.

     1.     Position and Duties. You are employed by the Company as its Vice President, Business Development, reporting to me. You accept continued employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your time, energy and skill to your duties at the Company.

     2.     Term of Employment. Your employment with the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to the provisions of Paragraphs 4 and 5 below.

     3.     Compensation. You will be compensated by the Company for your services as follows:

            a.     Salary: Effective April 1, 2006, you will be paid a monthly base salary of $21,667.00, less applicable withholding, in accordance with the Company’s normal payroll procedures. Your salary may be reviewed from time to time, and may be subject to adjustment based upon various factors including, but not limited to, your performance and the Company’s profitability. Any adjustment to your salary shall be made at the sole discretion of the Company. Your base salary will not be reduced except as part of a salary reduction program that similarly affects all members of the executive staff reporting to the Chief Executive Officer of the Company.

            b.     Bonus: To the extent that the Company has one, you will be eligible to participate in any Company executive incentive bonus plan.

            c.     Benefits: You will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company medical, disability or other group insurance plans, as well as under the Company’s business expense reimbursement and other policies. You will accrue paid vacation in accordance with the Company’s vacation policy or other specific arrangements made by the Company.

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     4.     Voluntary Termination. In the event that you voluntarily resign from your employment with the Company, or in the event that your employment terminates as a result of your death, you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. You agree that if you voluntarily terminate your employment with the Company for any reason, you will provide the Company with at least 10 days’ written notice of your resignation. The Company shall have the option, in its sole discretion, to make your resignation effective at any time prior to the end of such notice period, provided the Company pays you an amount equal to the base salary you would have earned through the end of the notice period.

     5.     Other Termination. Your employment may be terminated under the circumstances set forth below.

            a.     Termination by Disability. If, by reason of any physical or mental incapacity, you have been or will be prevented from performing your then-current duties under this Agreement for more than three consecutive months, then, to the extent permitted by law, the Company may terminate your employment without any advance notice. Upon such termination, if you sign a general release of known and unknown claims in a form satisfactory to the Company, the Company will provide you with the severance payments and benefits described in Paragraph 5(c). Nothing in this paragraph shall affect your rights under any applicable Company disability plan; provided, however, that your severance payments will be offset by any disability income payments received by you so that the total monthly severance and disability income payments during your severance period shall not exceed your then-current base salary.

            b.     Termination for Cause or Death: The Company may terminate your employment at any time for cause (as described below). If your employment is terminated by the Company for cause, or if your employment terminates as a result of your death, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination for cause. Provided, however, that if your employment terminates as a result of your death, the Company will also pay your estate the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid at the time that incentive bonus is paid to other Company employees.

     For purposes of this Agreement, a termination “for cause” occurs if you are terminated for any of the following reasons: (i) theft, dishonesty, misconduct or falsification of any employment or Company records; (ii) improper disclosure of the Company’s confidential or proprietary information; (iii) any action by you which has a material detrimental effect on the Company’s reputation or business; (iv) your refusal or inability to perform any assigned duties (other than as a result of a disability) after written notice from the Company to you of, and a reasonable opportunity to cure, such failure or inability; or (v) your conviction (including any plea of guilty or no contest) for any criminal act that impairs your ability to perform your duties under this Agreement.

            c.     Termination Without Cause: The Company may terminate your employment without cause at any time. If your employment is terminated by the Company

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without cause, and you sign a general release of known and unknown claims in a form satisfactory to the Company, you will receive the following severance benefits:

                   i.     severance payments at your final base salary rate for a period of 12 months following your termination; such payments will be made in accordance with the Company’s normal payroll practices;

                   ii.     payment of the premiums necessary to continue your group health insurance under COBRA until the earlier of 18 months following your termination date; (y) the date you first became eligible to participate in another employer’s group health insurance plan, or (z) the date on which you are no longer eligible for COBRA coverage;

                   iii.     the Company will pay you the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid to you at the time that incentive bonus is paid to other Company employees;

                   iv.      with respect to any stock options granted to you by the Company, you will cease vesting upon your termination date; however, you will be entitled to purchase any vested shares of stock that are subject to those options until the earlier of 12 months following your termination date, or (y) the date on which the applicable option(s) expires; except as set forth in this subparagraph, your Company stock options will continue to be subject to and governed by the applicable stock option agreements between you and the Company;

                   v.      payment of your then-provided Company car allowance for the period described in subparagraph 5(c)(i); and

                   vi.     outplacement assistance selected and paid for by the Company.

            d.     Resignation for Good Reason: If you resign from your employment with the Company for Good Reason (as defined in this paragraph), and you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(c). For purposes of this paragraph, “Good Reason” means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Company’s Chief Executive Officer of said condition(s):

                   i.      a reduction in your base salary of 20% or more, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or

                   ii.     a material reduction in your employee benefits, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or

                   iii.     the relocation of the Company’s workplace at which you are officed to a location that is more than 75 miles from the Company’s workplace prior to such relocation.

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     The foregoing condition(s) shall not constitute “Good Reason” if you do not provide the Chief Executive Officer with the notice described above within 45 days after you first become aware of the condition(s).

            e.     Termination As a Result of Change of Control: If there is a Change of Control (as defined below), your employment with the Company will terminate upon such Change of Control. If, upon such termination, you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(c); provided, that the time period set forth in subparagraph 5(c)(i), (ii), (iv)(x), and (v) shall be increased by an additional twelve (12) months. In addition, you shall receive a payment equal to the greater of (i) the average of the annual incentive bonus payments received by you, if any, for the previous three years, or (ii) your target incentive bonus for the year in which your employment terminates. Such payment will be made to you within 15 days following your execution of the general release of claims described above. The Company will also accelerate the vesting of all unvested stock options granted to you by the Company such that all of your Company stock options will be fully vested as of the date of your termination.

     6.     Change of Control/Good Reason.

            a.     For purposes of this Agreement, a “Change of Control” of the Company shall mean:

                   i.      The direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept;

                   ii.     a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors;

                   iii.     a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

                   iv.     the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company’s subsidiary corporations);

                   v.     the complete liquidation or dissolution of the Company;

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                   vi.     any reverse merger in which the Company is the surviving entity but in which securities possessing more than [forty percent (40%)] of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or

                   vii.     the acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership ( within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than [forty percent (40%)] of the total combined voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator of the Company Stock Option Plan determines shall not be a Corporate Transaction.

For the purposes of this Agreement, the terms “Continuing Directors,” “Corporate Transaction,” “Affiliate” and “Associate” shall have the meanings ascribed to such terms in the Company’s Stock Option Plan.

     7.     Confidential and Proprietary Information: As a condition of your continued employment, and to the extent that you have not done so already, you agree to sign and abide by the Company’s standard form of employee proprietary information/confidentiality/assignment of inventions agreement.

     8.     Termination Obligations.

            a.     You agree that all property, including, without limitation, all equipment, proprietary information, documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by you in the course of or incident to your employment, belongs to the Company and shall be returned to the Company promptly upon any termination of your employment.

            b.      Upon your termination for any reason, and as a condition of your receipt of any severance benefits hereunder, you will promptly resign in writing from all offices and directorships then held with the Company or any affiliate of the Company.

            c.     Following the termination of your employment with the Company for any reason, you shall fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company. You shall also cooperate in the defense of any action brought by any third party against the Company.

     9.     Federal Excise Tax Under Section 4999 of the Code.

            a.     To the extent that any payments and benefits provided for in this Agreement or otherwise payable to you (the “Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and are subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), the Company shall pay to you within ninety (90) days of

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the date you become subject to the Excise Tax, an additional one-time amount (the “Gross-Up Payment”) equal to the sum of the Excise Tax imposed on the Payments and the Excise Tax imposed on the Gross-Up Payment in accordance with the following formula: E/(1 — R), where (i) “E” is the amount of the Excise Tax computed on the Payments determined without regard to payment of the Gross-Up Payment, and (ii) “R” is the rate of Excise Tax. The Company shall not pay to you the amount of any federal, state and local income or employment taxes imposed on the Payments or the Gross-Up Payment.

            b.     Unless the Company and you otherwise agree in writing, any determination required under this Subsection shall be made in writing by independent public accountants appointed by the Company and reasonably acceptable to you (the “Accountants”), whose determination shall be conclusive and binding upon you and the Company for all purposes. The Company shall bear all costs the Accountants may reasonably incur in connection with such determination, and the Company and you shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Subsection.

            c.     In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax you are repaying), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code.

            d.     In the event that the Excise Tax is determined to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment to you in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined.

     10.     Other Activities. In order to protect the Company’s valuable proprietary information, you agree that during your employment and for a period of [one] year[s] following the termination of your employment with the Company for any reason, you will not, as a compensated or uncompensated officer, director, consultant, advisor, partner, joint venturer, investor, independent contractor, employee or otherwise, provide any labor, services, advice or assistance to any entity, or its successor, which is a direct competitor of the Company (and specifically identified as such in the Company’s Form 10K), unless specifically permitted to do so in writing by the Company or its successor. You acknowledge and agree that the restrictions contained in the preceding sentence are reasonable and necessary, as there is a significant risk that your provision of labor, services, advice or assistance to any of those competitors could result in the inevitable disclosure of the Company’s proprietary information. You further acknowledge and agree that the restrictions contained in this paragraph will not preclude you from engaging in any trade, business or profession that you are qualified to engage in.

     11.     Dispute Resolution. In the event of any dispute or claim relating to or arising out of your employment relationship with the Company, this Agreement, or the termination of your employment with the Company for any reason (including, but not limited to, any claims of

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breach of contract, wrongful termination or age, sex, race, sexual orientation, disability or other discrimination or harassment), you and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. You and the Company hereby knowingly and willingly waive your respective rights to have any such disputes or claims tried to a judge or jury. Provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by you or the Company.

     12.     Severability. If any provision of this Agreement is deemed invalid, illegal or unenforceable, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected.

     13.     Applicable Withholding. All salary, bonus, severance and other payments identified in this Agreement are subject to applicable withholding by the Company.

     14.     Assignment. In view of the personal nature of the services to be performed under this Agreement by you, you cannot assign or transfer any of your obligations under this Agreement.

     15.     Entire Agreement. This Agreement and the agreements referred to above constitute the entire agreement between you and the Company regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral, including your Employment Agreement dated May 14,2002 with the Company. This Agreement sets forth our entire agreement regarding the Company’s obligation to provide you with severance benefits upon any termination of your employment, and you shall not be entitled to receive any other severance benefits from the Company pursuant to any Company severance plan, policy or practice.

     16.     Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California.

     17.     Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized representative of the Company.

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     ___, we look forward to continuing to work with you at DMC Stratex Networks, Inc. Please sign and date this letter on the spaces provided below to acknowledge your acceptance of the terms of this Agreement.

Sincerely, Stratex Networks, Inc.
By:	/s/ Charles D. Kissner
	Charles D. Kissner

     I agree to and accept continued employment with DMC Stratex Networks, Inc. on the terms and conditions set forth in this Agreement.

Date: April 19, 2006	/s/ John Brandt
	John Brandt

8

EX-10.20

Exhibit 10.20

AMENDMENT TO EMPLOYMENT AGREEMENT

Amendment (A)

     John Brandt (“Executive”) and Stratex Networks, Inc., formerly DMC Stratex Networks, Inc. (the “Company”), are parties to an Employment Agreement of April 1, 2006 (the “Agreement”). Executive and the Company now wish to amend the Agreement, and thus they agree as set forth below.

     1.      The following is added to Paragraph 5(c)(ii) of the Agreement: “provided, however, that if you are 60 years of age or older on the date of your termination without cause, and if you have been employed by the Company for not less than three years as of the date of your termination without cause, the Company will pay the premiums necessary to continue your Company group health insurance coverage under COBRA (or to provide you with comparable health insurance coverage) until you reach the age of 65 or until you are eligible to participate in another employer’s group health insurance plan, whichever comes first;”.

     2.      In Paragraph 5(e) of the Agreement, the phase “(ii to a maximum of 18 months, unless you are 60 years of age or older on the date of your termination/resignation and you have been employed by the Company for not less than three years as of the date of your termination/resignation, in which case the last clause of subparagraph 5(c)(ii) shall apply)” shall be inserted following the phrase “subparagraph 5(c)(i),”.

     3.     In Paragraph 11 of the Agreement, the last sentence (“Provided, however . . .”) is hereby deleted and replaced with the following sentence: “Any arbitration conducted under this Paragraph will be pursuant to the American Arbitration Association’s (“AAA”) National Rules for the Resolution of Employment Disputes, a copy of which can be found on the AAA’s website at www.adr.org.”

     Except as modified by this Amendment, the Agreement will remain in full force and effect.

Dated: April 19, 2006	/s/ John Brandt
	John Brandt

Dated: April 19,2006	Stratex Networks, Inc.
	By:	/s/ Charles D. Kissner
		Its: Chairman and Chief Executive Officer

EX-13.1

Exhibit 13.1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

• Our belief that we have accomplished these financial improvements mainly because of the success of the expanding Eclipse product line and due to the streamlining of operations by taking certain cost reduction measures over the past few years;

• Our expectation that cash usage in fiscal 2007 will be constrained as our days sales outstanding (“DSO”) for receivables is expected to increase back to normal levels of 70 to 75 days;

• Our belief that increase in revenue was primarily attributable to an increase in the demand for our product Eclipse due to wireless subscriber growth and growth in fixed wireless transmission infrastructures in developing countries as well as increased use of Eclipse in data transmission applications;

• Our belief that global economic growth rates though modest also contributed to the increase in revenue;

• Our belief that improved market conditions was also one of the factors contributing to the increase in net sales in fiscal 2005 as compared to fiscal 2004;

• Our expectation that cash requirements for the product operating segment will continue to be primarily for working capital requirements, restructuring payments and research and capital expenditures;

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

• Our expectation that gross margins will improve further due to increase in sales of our Eclipse product line , which has higher margins as compared to our legacy product lines;

• Our expectation that research and development expenses will increase in fiscal 2007 as compared to fiscal 2006 due to increases in salaries and related personnel expenses as well as modest increases in personnel employed in this area;

• Our expectation that $3.4 million of the remaining restructuring accrual balance ($0.2 million of severance and benefits, $0.3 million of legal and other costs and $2.9 million of vacated building lease obligations) will be paid out in fiscal 2007 and vacated building lease obligations of $14.5 million will be paid out during fiscal 2008 through fiscal 2012.

• Our belief that our warranty accrual is adequate and that the judgment applied is appropriate;

• Our judgement regarding the valuation of deferred tax assets;

• Our plan to minimize our overall customer financing exposure by discounting receivables when possible, raising third party financing and arranging letters of credit;

• Our belief that our available cash and cash equivalents at March 31, 2006, cash generated from operations combined with our revolving credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures through March 31, 2007 and

• Our belief that we have the financial resources needed to meet our business requirements for the next 12 months.

All forward looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward looking statement or

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

statements. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied in such forward looking statements. To review some of these risks as well as risks to our business in general, please see the cautionary statements and risk factors listed in our Annual Report and those listed from time to time in our Reports on Forms 10-Q and
8-K, including those contained in “Critical accounting policies and estimates” beginning on page 3,” “Factors That May Affect Future Financial Results,” beginning on page 19 in this Annual Report and Item 1A. “Risk Factors” of our Annual report on Form 10-K for the fiscal year ended March 31, 2006.

Business Overview

We design, manufacture, market and sell advanced wireless solutions for worldwide mobile and fixed telephone network interconnection and access. Since our founding in 1984, we have introduced a number of innovative products in the telecommunications market and have delivered wireless transmission systems for the transport of data, voice and video communication, including comprehensive service and support. We market our products primarily to mobile wireless carriers around the world. Our solutions also address the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. We provide our customers with a broad product line, which contains products that operate using a variety of transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a variety of transmission capacities, typically ranging from 64 Kilobits to 2OC-3 or 311 Megabits per second (Mbps). Our broad product line allows us to market and sell our products to service providers worldwide with varying interconnection and access requirements. We also sell our products to agents, distributors and base station suppliers, who provide and install integrated systems to service providers. We have equipment installed in over 150 countries, and a significant percentage of our revenue is derived from sales outside the United States. Our revenues from sales of equipment and services outside the United States were 95% in fiscal 2006, 94% in fiscal 2005 and 96% in fiscal 2004.

In fiscal 2006, we continued to focus our efforts and made significant progress in transitioning from our legacy products to the Eclipse business model. We introduced some initial products as part of our plan to roll out the next generation of Eclipse products. Our results of operations improved significantly in fiscal 2006 as compared to fiscal 2005. We achieved key milestones that we had been focusing on as part of our strategic plan.

As indicated in the table below, our gross margins improved steadily in fiscal 2006. In the third and the fourth quarter of fiscal 2006 we reported net income as opposed to the net losses reported in the first two quarters of fiscal 2006.

	(in millions)
	Q4 FY 2006			Q3 FY 2006			Q2 FY 2006			Q1 FY 2006
Net income/(loss)		$3.3			$0.8			($2.3	)		($4.2	)
Gross Margin		30.7	%		29.2	%		26.8	%		23.0	%

We believe that we have accomplished these financial improvements mainly because of the success of the expanding Eclipse product line and due to the streamlining of operations by taking certain cost reduction measures over the past few years. Orders for Eclipse products were at $174.8 million in fiscal 2006, a 144% increase compared to the $71.7 million in orders in fiscal 2005. Revenue from Eclipse products in fiscal 2006 was $134.5 million as compared to $39.6 million in fiscal 2005.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to the corporate achievements discussed above, the other significant events in fiscal 2006 were as follows:

Expanded the existing line of credit with a commercial bank from $35 million to $50 million and borrowed $20 million in March 2006 under this line of credit. In order to meet our increasing working capital requirements, we entered into an agreement with Silicon Valley Bank to expand our existing line of credit from $35 million to $50 million and extended the facility to an additional one year period through April 2008. We borrowed $20 million on March 1, 2006 under this facility at a fixed interest rate of 7.25 percent to be repaid over a period of four years.

Alcatel licensing agreement. In January 2006, we entered into a four year agreement with Alcatel to license certain Eclipse software and products to Alcatel. Please see “Revenue Recognition” below for additional details regarding this agreement.

Critical accounting policies and estimates

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, including the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. We recognize revenue pursuant to Staff Accounting Bulletin No. 104 (“SAB 104”) “Revenue Recognition”. Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that the arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.

In accordance with SAB 104, revenues from product sales are generally recognized when title and risk of loss passes to the customer and the above criteria are met, except when product sales are combined with significant post-shipment installation services. Under this exception, revenue is deferred until such services have been performed. Installation service revenue is recognized when the related services are performed. When sales are made under payment terms beyond the normal credit terms, revenue is recognized only when cash is collected from the customer unless the sale is covered by letters of credit or other bank guarantees. Revenue from service obligations under maintenance contracts is deferred and recognized on a straight-line basis over the contractual period, which is typically one year.

In fourth quarter of fiscal 2006, we entered into a four year agreement with Alcatel to license certain Eclipse software and products to Alcatel. Alcatel will pay us a license fee based on the dollar value of Alcatel’s quarterly purchases from our contract manufacturers. There is a minimum quarterly license fee that will be recognized as revenue in the fiscal quarter it is invoiced. License fees beyond the quarterly minimum will be recognized as revenue in the quarter when they are invoiced, due and payable.

Included in the agreement are certain additional support services that may be provided by us to Alcatel. In accordance with Emerging Issues Task Force (“EITF”) 00-21 “Revenue Arrangements with Multiple

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Deliverables” we determined that revenue related to these services should be recognized separately from the license fee and accordingly will be recognized when the services are performed.

Provision for warranty. At the time revenue is recognized, we establish an accrual for estimated warranty expenses associated with our sales, recorded as a component of cost of sales. Our standard warranty is generally for a period of 27 months from the date of sale if the customer uses us or our approved installers to install the products; otherwise it is 15 months from the date of sale. The warranty accrual is made based on forecasted returns and average cost of repair. Forecasted returns are based on trended historical returns. While we believe that our warranty accrual is adequate and that the judgment applied is appropriate, such amounts estimated could differ materially from what will actually transpire in the future. If our actual warranty costs are greater than the accrual, cost of sales will increase in the future. See Note 9 of our footnotes to financial statements for further details of our warranty accrual for fiscal years 2006, 2005 and 2004.

Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market, where cost includes material, labor, and manufacturing overhead. We regularly monitor inventory quantities on hand and record a provision for excess and obsolete inventories based primarily on our forecast of future product demand and production requirements. Included in cost of sales are inventory provisions of $3.6 million for fiscal 2006 and $2.9 million for fiscal 2005. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could significantly impact the value of our inventory and our reported operating results. If actual market conditions are less favorable than our assumptions, additional provisions may be required. Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of sales at the time of such determination. If our inventory is determined to be undervalued, we may have overstated our cost of sales in previous periods and would be required to report lower cost of sales in a future period.

We currently subcontract substantially all of our manufacturing. Each month we provide our suppliers with a six month forecast so they can secure long-lead parts in order to be able to meet forecast delivery schedules. We are generally obligated to pay for long-lead items purchased by our suppliers based on our forecasts. If actual demand of our products is below the projections, we may have excess inventory as a result of our purchase commitments for long lead-time components with our contract manufacturers. This would be recorded as additional provisions for excess inventory as a component of cost of sales.

Valuation of Long-Lived Assets. We account for impairment or disposal of long-lived assets in accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS 121”), by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. We value assets based on the fair value of the asset. In fiscal 2005, we recorded an impairment loss on property and equipment of $0.9 million. In fiscal 2006, there was no impairment loss recorded on long-lived assets.

Valuation of Intangible Assets. We account for intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142. SFAS No. 142 requires that goodwill and identifiable intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We review our intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

In fiscal 2004, we acquired intangible assets of $2.4 million. We were amortizing these intangible assets over their estimated useful life of 18 months. During fiscal 2005, we reviewed our intangible assets for impairment and accelerated the amortization of the intangible assets as we concluded they were impaired. We amortized the entire balance of intangible assets in the third quarter of fiscal 2005. During fiscal 2006, we did not record any intangible assets.

Restructuring and Impairment Charges. Liability for costs associated with an exit or disposal activity is recognized when the liability is incurred in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). Prior to December 31, 2002 we have accounted for restructurings in accordance with Emerging Issues Task Force No. 94-3, ‘Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” or EITF No. 94-3 and SAB No. 100, “Restructuring and Impairment Charges”. Under EITF 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. The restructuring accrual related to vacated properties was calculated net of estimated sublease income we expect to receive once we sublease the properties that have been vacated. To determine the lease loss, certain assumptions were made related to (1) the time period over which the buildings will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The lease loss represents management’s estimate of time to sublease and actual sublease rates. Sublease income is estimated based on current market quotes for similar properties. If we are unable to sublease these properties on a timely basis or if we are forced to sublease them at lower rates due to changes in market conditions, we would adjust the accrual accordingly. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In fiscal 2005 and fiscal 2004 we recorded restructuring charges of $2.3 million and $4.0 million, respectively, for lease obligations related to buildings that were vacated in fiscal 2003 and fiscal 2002 primarily due to a change in the estimate of sublease income which was initially estimated at the time the buildings were vacated.

Provision for uncollectible receivables. In establishing the appropriate provisions for trade and long-term receivables due from customers, we make assumptions with respect to their future collectibility. Our assumptions are based on an individual assessment of a customer’s credit quality as well as subjective factors and payment trends, including the aging of receivable balances. Generally, these individual credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the exposure and consider:

• a customer’s ability to meet and sustain their financial commitments;

• a customer’s current and projected financial condition; and

• the positive or negative effects of the customer’s current and projected industry outlook.

Deferred taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. To the extent that our estimates regarding valuation allowance are understated, additional charges to income tax expense would be recorded in

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the period in which we determine such understatement. If our estimates are overstated, income tax benefits will be recognized when realized. As of March 31, 2006, we believe that all the deferred tax assets recorded on the balance sheet are not realizable in the foreseeable future and we have recorded a full valuation allowance accordingly. For details regarding our deferred tax assets please see Note 10 of our footnotes to the Consolidated Financial Statements included in this Annual Report.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Revenues

Net sales for fiscal 2006 increased to $230.9 million, compared to $180.3 million reported in fiscal 2005. We believe that this increase was primarily attributable to an increase in the demand for our newest Eclipse product line due to wireless subscriber growth and growth in fixed wireless transmission infrastructures in developing countries as well as increased sales for data applications as a result of the Eclipse product features which specifically address this market. We believe that global economic growth rates, though modest, also contributed to the increase in revenue.

Net sales for fiscal 2005 increased to $180.3 million, compared to $157.3 million reported in fiscal 2004. This increase was partly due to increased sales of our new Eclipse product line, which began shipping in the fourth quarter of fiscal 2004. Eclipse sales accounted for $39.6 million, almost 22%, of our total revenue for fiscal 2005. We believe that improved market conditions was also one of the factors contributing to the increase of net sales in fiscal 2005 as compared to fiscal 2004. Capital spending in the telecommunications market showed a gradual improvement during fiscal 2005.

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

	Years ended March 31,
			% of					% of					% of
	2006		Total			2005		Total			2004		Total
United States	$	11,235		5	%	$	11,446		6	%	$	6,314		4	%
Other Americas		23,676		10	%		23,839		13	%		18,870		12	%
Russia		15,684		7	%		35,456		20	%		14,689		9	%
Poland		25,905		11	%		10,811		6	%		5,896		4	%
Other Europe		32,766		14	%		22,144		12	%		30,269		19	%
Middle East		26,498		12	%		17,520		10	%		16,416		11	%
Nigeria		19,090		8	%		10,081		6	%		25,705		16	%
Other Africa		18,034		8	%		16,963		9	%		9,824		6	%
Bangladesh		22,301		10	%		1,637		1	%		—		—
Other Asia/Pacific		35,703		15	%		30,405		17	%		29,365		19	%
Total Revenues	$	230,892		100	%	$	180,302		100	%	$	157,348		100	%

Net sales in fiscal 2006 compared to net sales in fiscal 2005 increased significantly in Poland, Nigeria, Bangladesh, Middle East and Other Europe regions. This increase was partially offset by a significant decrease in revenue in the Russia region. Sales in Poland increased due to increased sales to an existing long-term customer and in part due to sales to a new customer. Net sales in the Middle East increased significantly mainly due to increased sales to one major customer in that region. Net sales to Nigeria in fiscal 2006 increased to $19.1 million as compared to $10.1 million in fiscal 2005 mainly due to network expansion by one major customer in that region. Revenue in Bangladesh increased significantly to $22.3 million in fiscal 2006 from $1.6 million in fiscal 2005 due to the rapid expansion of several networks in the region. Revenue in Thailand in Other Asia/Pacific region increased to $13.9 million in fiscal 2006 as compared to $4.3 million in fiscal 2005. The increase in revenue in Thailand was due to increased shipments to a major customer in that region and also due to recognition of revenue in the first quarter of fiscal 2006 of $4.4 million on one major sale of legacy equipment that had previously been deferred due to credit status. Net sales in Russia decreased in fiscal

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2006 to $15.7 million from $35.5 million fiscal 2005 mainly because of reduced sales to one customer in that region.

Net sales in fiscal 2005 compared to fiscal 2004 increased significantly in Russia, the Americas, Poland and Other Africa regions while decreasing significantly in Nigeria and Other Europe regions. The increase in net revenue in Russia was primarily due to increased sales to one customer in that region. The increase in net sales in the Americas from $25.2 million in fiscal 2004 to $35.3 million in fiscal 2005 was partly due to the increase in sales of our license exempt product line we acquired in fiscal 2004 and partly due to securing a new customer in Latin America. Americas sales also increased due to sales to an existing customer who had no shipments in the Americas in fiscal 2004. The decrease in net sales in Nigeria from $25.7 million in fiscal 2004 to $10.1 million in fiscal 2005 was due to a decline in shipments to one customer as their network expansion project neared completion. Net sales in the Other Europe region decreased to $22.1 million in fiscal 2005 as compared to $30.3 million in fiscal 2004. Net sales to Poland increased significantly to $10.8 million in fiscal 2005 as compared to $5.9 million in fiscal 2004 due to increase in sales to an existing customer in that region. Sales in the Other Europe region decreased due to a declining customer base and lower sales in Eastern Europe.

Orders and backlog. In fiscal 2006, we received $255.9 million in new orders as compared to $ 208.9 million in fiscal 2005 and $196.3 million in fiscal 2004. The backlog at March 31, 2006 was $86.4 million compared to $69.7 million at March 31, 2005 and $59.1 million at March 31, 2004.

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

	Years ended March 31,
	2006		2005
Number of customers		3		2
Percentage of Backlog		12%, 11%, 10%		13%, 12%

Orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. We include in our backlog purchase orders for which a delivery schedule has been specified for product shipment within one year. We review our backlog on an ongoing basis and make adjustments to it as required. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of future sales.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Product operating segment. The revenue and operating income for the Product operating segment for the three years ended March 31 were as follows (in thousands):

				% of						% of						% of
	2006			Total			2005			Total			2004			Total
Eclipse	$	134,479			68	%	$	39,599			26	%	$	3,348			3	%
XP4		19,417			10	%		64,125			42	%		57,497			44	%
DXR		14,777			7	%		16,120			11	%		23,917			18	%
Altium		19,730			10	%		23,985			16	%		39,613			31	%
Other Products		9,785			5	%		7,787			5	%		4,718			4	%
Total Revenue	$	198,188					$	151,616					$	129,093
Operating Loss	$	(3,692	)		(1.9	)%	$	(47,064	)		(31	)%	$	(39,987	)		(31	)%

Net product revenues increased to $198.2 million in fiscal 2006 from $151.6 million in fiscal 2005. This increase was primarily due to a significant increase in sales of Eclipse product line. Sales of Eclipse accounted for 68% of the total revenue, which increased from $39.6 million in fiscal 2005 to $134.5 million in fiscal 2006, a 240% increase. Sales of our older Altium, XP4 and DXR product lines decreased as demand for these products was replaced with our new Eclipse product line.

Operating loss from the product segment reduced significantly to $3.7 million in fiscal 2006 from $47.1 million in fiscal 2005. This was primarily due to improved gross margins on increased sales of our Eclipse product line. We believe that demand for the new Eclipse product line will continue to increase.

Net product revenues increased from $129.1 million in fiscal 2004 to $151.6 million in fiscal 2005. This increase is due primarily to our new Eclipse product line, which began shipping in the fourth quarter of fiscal 2004, and which increased from $3.3 million in fiscal 2004 to $39.6 million in fiscal 2005. Revenue from our older Altium product line decreased from $39.6 million in fiscal 2004 to $24.0 million in fiscal 2005 as demand for this product was replaced with our new Eclipse product line. The increase in net revenue for our XP4 product line from $57.5 million in fiscal 2004 to $64.1 million in fiscal 2005 is primarily due to an existing customer in Russia that was continuing to expand its network. The decrease in net revenue from our DXR product line from $23.9 million in fiscal 2004 to $16.1 million in fiscal 2005 was due to lower demand for this product which is used in limited applications.

The operating loss from the product segment in fiscal 2005 as a percentage of net product segment revenue remained the same as compared to the operating loss recorded in fiscal 2004. Though product revenue increased substantially in fiscal 2005 as compared to fiscal 2004, the operating loss did not decrease primarily due to the restructuring charges of $7.4 million and inventory valuation charges of $2.6 million recorded in fiscal 2005.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Service Operating Segment. The revenue and operating income for the Service operating segment for the three years ended March 31 were as follows: (in thousands)

			% of						% of					% of
	2006		Revenue			2005			Revenue			2004		Revenue
Field Service revenue	$	20,545				$	16,605					$	15,404
Operating income/(loss)		1,116		5	%		(516	)		(3	)%		665		4	%
Repair revenue		12,159					12,081						12,851
Operating income		4,898		40	%		3,859			32	%		4,777		37	%
Total Service Revenue	$	32,704				$	28,686					$	28,255
Total Operating Income	$	6,014		18	%	$	3,343			12	%	$	5,442		19	%

Services revenue includes, but is not limited to, installation, network design, path surveys, integration and other revenues derived from the services we provide to our customers.

In fiscal 2006, field service revenue increased to $20.5 million as compared to $16.6 million in fiscal 2005 due to the increase in product revenues associated with field services. Operating income from field service revenue was $1.1 million in fiscal 2006 as compared to a loss of $0.5 million in fiscal 2005 due to fixed field service costs being spread over higher revenue levels. Repair revenue did not change significantly in fiscal 2006 as compared to fiscal 2005. Though repair revenue did not change significantly operating income improved as we reduced our expenses in this area.

In fiscal 2005, field service revenue increased to $16.6 million as compared to $15.4 million in fiscal 2004. Despite the increase, we incurred an operating loss in fiscal 2005 as compared to an operating income in fiscal 2004, primarily due to project delays resulting in higher costs and also due to costs for modifying an installation for a major customer. Repair revenue decreased slightly in fiscal 2005 to $12.1 million from $12.9 million in fiscal 2004. Operating income for the repair segment, as a percentage of repair revenue, for fiscal 2005 decreased to 32% from 37% in fiscal 2004 because of lower absorption of fixed costs due to lower revenues.

Cash used in the service operating segment was primarily to purchase spare parts to provide repair services to our customers and to pay labor expenses. We also paid cash to several third party vendors to help us install our products. In fiscal 2005 and fiscal 2004, we purchased approximately $2.9 million and $4.4 million of spare parts, respectively. We expect the cash requirements for this segment to continue to be primarily for labor costs and spare parts.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gross Profit

	Years ended March 31,
	(In Thousands)
			% of Net					% of Net						% of Net
	2006		Sales			2005		Sales			2004			Sales
Net sales	$	230,892		100	%	$	180,302		100	%	$	157,348			100	%
Cost of sales		167,303		72.5	%		151,398		84.0	%		129,689			82.4	%
Inventory valuation charges (benefits)		—		—			2,581		1.4	%		(498	)		(0.3	)%
Gross profit	$	63,589		27.5	%	$	26,323		14.6	%	$	28,157			17.9	%

Gross profit as a percentage of net sales increased to 27.5% in fiscal 2006 compared to a gross profit of 14.6% in fiscal 2005. This increase in gross profit was primarily due to a favorable product mix impact of approximately 5%. Higher sales of our Eclipse product line contributed significantly to the increase in gross margins. Lower costs had a favorable impact of approximately 12%. Pricing had an unfavorable impact of 5%. The gross profit of fiscal 2005 was negatively impacted by 1% due to inventory valuation charges of $2.6 million.

Gross profit as a percentage of net sales decreased to 14.6% in fiscal 2005 compared to a gross profit of 17.9% in fiscal 2004. The gross profit for fiscal 2005 was negatively impacted by 1% due to inventory valuation charges of $2.6 million recorded in fiscal 2005. An inventory valuation benefit of $0.5 million was recorded in fiscal 2004. The inventory valuation charges were for excess inventories not expected to be sold and the inventory valuation benefit was from sale of excess inventories reserved in prior periods. Pricing had a negative impact of approximately 2% on the gross margin of fiscal 2005 as compared to the gross margin of fiscal 2004. We expect gross margins to improve further in fiscal 2007 due to an increase in sales of our Eclipse product line which has higher margins as compared to our legacy product lines.

Research and Development

	Years ended March 31,
	(In Thousands)
	2006		2005		2004
Research and development	$	14,475	$	16,661	$	17,151
% of net sales		6.3%		9.2%		10.9%

In fiscal 2006, research and development expenses decreased to $14.5 million from $16.7 million in fiscal 2005. This decrease was primarily due to the shut down of our Cape Town, South Africa operations in the third quarter of fiscal 2005 as part of a restructuring plan and the reduced engineering expenses related to our legacy products. We expect research and development expenses to increase in fiscal 2007 as compared to fiscal 2006 due to inflationary effects on salaries as well as limited personnel additions.

In fiscal 2005, research and development expenses decreased to $16.7 million from $17.2 million in fiscal 2004. This decrease was primarily due to shut down of the CapeTown South Africa operations as discussed above.

11

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Selling, General and Administrative

	Years ended March 31,
	(In Thousands)
	2006		2005		2004
Selling, general and administrative	$	46,792	$	44,379	$	39,273
% of net sales		20.3%		24.6%		25.0%

In fiscal 2006, selling, general and administrative expenses increased to $46.8 million from $44.4 million in fiscal 2005. This increase was primarily due to higher third party agent commissions on sales of our products resulting from an increase in net sales, especially in the Asia/Pacific region. Net sales in the Asia/Pacific region in fiscal 2006 were $58.0 million as compared to $32.0 million in fiscal 2005. As a percentage of net sales, selling, general and administrative expenses declined to 20.3% in fiscal 2006 from 24.6% in fiscal 2005 primarily because of the increase in net sales.

In fiscal 2005, selling, general and administrative expenses increased to $44.4 million from $39.3 million in fiscal 2004. This increase was due to higher third party agent commissions on sales of our products resulting from an increase in net sales, especially in the Asia/Pacific region, and higher receivable valuation charges. In fiscal 2005, we recorded a $1.1 million accrual for our receivables which were deemed not collectible. In addition, we incurred increased costs and audit fees for documentation and testing related to implementation of requirements of the Sarbanes-Oxley Act 2002. As a percentage of net sales, selling, general and administrative expenses declined to 24.6% in fiscal 2005 from 25.0% in fiscal 2004 primarily because the rate of increase in net sales exceeded the rate of increase in selling, general and administrative expenses.

Restructuring Charges

	Years ended March 31,
	(In Thousands)
	2006		2005		2004
Restructuring charges	$	—		$7,423	$	5,488
% of net sales		—		4.1%		3.5%

We did not record any restructuring charges in fiscal 2006.

In fiscal 2005, we recorded $7.4 million of restructuring charges. In order to reduce expenses and increase operational efficiency, we implemented a restructuring plan in the third quarter of fiscal 2005 which included the decision to shut down operations in Cape Town, South Africa, outsource the manufacturing at the New Zealand and Cape Town, South Africa locations and exiting the sales and service offices in Argentina, Colombia and Brazil to independent distributors. As part of the restructuring plan, we reduced the workforce by 155 employees and recorded restructuring charges for employee severance and benefits of $3.8 million in fiscal 2005. We also recorded $2.3 million for building lease obligations, $0.8 million for fixed asset write-offs and $0.5 million for legal and other costs.

In fiscal 2004, we recorded $5.5 million of restructuring charges. We reduced the workforce by 34 employees and recorded restructuring charges for employee severance and benefits of $0.9 million. The remaining $4.6 million of restructuring charges was for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003.

12

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following table summarizes the activity relating to restructuring charges for the three years ended March 31, 2006 (in millions):

	Severance			Facilities
	and Benefits			and Other			Total
Balance as of March 31, 2003	$	1.5		$	22.7		$	24.2
Provision in fiscal 2004		0.9			4.6			5.5
Cash payments		(1.3	)		(5.6	)		(6.9	)
Balance as of March 31, 2004		1.1			21.7			22.8
Provision in fiscal 2005		3.8			3.6			7.4
Cash payments		(3.8	)		(4.0	)		(7.8	)
Non-cash expense		—			(0.6	)		(0.6	)
Reclassification of related rent accruals		—			1.2			1.2
Balance as of March 31, 2005		1.1			21.9			23.0
Provision in fiscal 2006		—			—			—
Cash payments		(1.2	)		(3.6	)		(4.8	)
Reclassification		0.3			(0.6	)		(0.3	)
Balance as of March 31, 2006	$	0.2		$	17.7		$	17.9
Current portion	$	0.2		$	3.2		$	3.4
Long-term portion		—			14.5			14.5

The remaining accrual balance of $17.9 as of March 31, 2006 is expected to be paid out in cash. We expect $3.4 million of the remaining accrual balance ($0.2 million of severance and benefits, $0.3 million of legal and other costs and $2.9 million of vacated building lease obligations) to be paid out in fiscal 2007 and vacated building lease obligations of $14.5 million to be paid out during fiscal 2008 through fiscal 2012.

Interest Income, Interest Expense, Other Expenses

	Years ended March 31,
	(In Thousands)
	2006		2005		2004
Interest income	$	1,111	$	737	$	886
Interest expense		2,227		1,662		160
Other expenses, net		1,927		845		1,116

Interest income was $1.1 million in fiscal 2006 compared to $0.7 million in fiscal 2005. The increase was primarily due to higher interest rates in fiscal 2006 as compared to those in fiscal 2005. Interest income in fiscal 2005 decreased to $0.7 million from $0.9 million in fiscal 2004. This decrease was primarily due to lower average cash balances during fiscal 2005 as compared to fiscal 2004.

Interest expense increased to $2.2 million in fiscal 2006 as compared to $1.7 million in fiscal 2005 primarily due to bank borrowings under our credit facility on May 27, 2004 and March 1, 2006. Interest expense increased to $1.7 million in fiscal 2005 as compared to $0.2 million in fiscal 2004 due to bank borrowings of $25 million under our credit facility in the first quarter of fiscal 2005.

13

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other expenses net increased to $1.9 million in fiscal 2006 as compared to $0.8 million in fiscal 2005. This increase was primarily due to higher foreign currency exchange losses and an increase in the cost of hedging our foreign currency exposure risk. Other expenses reduced to $0.8 million in fiscal 2005 as compared to $1.1 million in fiscal 2004 primarily because of lower cost of hedging for foreign currency exposure in fiscal 2005 as we reduced our exposure by capitalizing certain intercompany balances with foreign subsidiaries.

Provision for Income Taxes

	Years ended March 31,
	(In Thousands)
	2006		2005		2004
Provision for income taxes		1,576		455		2,133

In fiscal 2006, we recorded income tax provision of $1.6 million as compared to a provision of $0.5 million in fiscal 2005. This increase in provision for income taxes was mainly due to an increase in taxable income of some of our foreign subsidiaries. Taxable income of our subsidiaries in Poland and Mexico increased significantly in fiscal 2006 as compared to fiscal 2005. Also, the number of subsidiaries with taxable income increased in fiscal 2006 as compared to fiscal 2005.

In fiscal 2005, we recorded an income tax provision of $0.5 million related to profits generated by certain foreign subsidiaries. In fiscal 2004, we wrote off $1.9 million of deferred tax assets relating to two of our foreign subsidiaries as it was more likely than not that we would not realize any benefit from these assets. We also recorded $0.2 million of income tax provision for our profitable foreign subsidiaries.

14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

Net cash used for operating activities in fiscal 2006 was $3.1 million, compared to net cash used by operating activities of $35.6 million in fiscal 2005. The discussion below related to changes in assets and liabilities excludes the impact of changes in foreign exchange rates. The amount used in operating activities was due to the recorded net loss, as adjusted to exclude non-cash charges and benefits and changes in working capital requirements, and a significant increase in accounts receivable, inventories and other assets.

Accounts receivable increased by $6.4 million in fiscal 2006 as compared to a $0.5 million increase in fiscal 2005 primarily because of higher sales levels.

Inventories increased in fiscal 2006 by $6.4 million as compared to an increase in fiscal 2005 of $1.5 million. The increase in inventories was primarily due to increased inventory levels to support the higher orders in fiscal 2006. As mentioned earlier, our backlog at the end of fiscal 2006 was $86.4 million as compared to $69.7 million at the end of fiscal 2005.

Accounts payable increased by $4.2 million in fiscal 2006 as compared to a decrease of $5.6 million in fiscal 2005 primarily because of higher inventory purchases to support higher sales level in fiscal 2006 and forecast for the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006.

Accrued liabilities increased by $3.7 million in fiscal 2006 as compared to an increase of $6.0 million in fiscal 2005. This was primarily due to an increase in accrued agent commissions in the Asia/ Pacific region, customer deposits and accrued customer credits.

Long term liabilities decreased by $3.6 million due to restructuring payments primarily related to long term lease obligations.

Net cash used by investing activities in fiscal 2006 was $1.0 million, compared to net cash provided by investing activities of $5.0 million in fiscal 2005. Purchases of property and equipment were $3.5 million in fiscal 2006 compared to $7.4 million in fiscal 2005. The decrease in capital expenditures was primarily due to a reduction in the purchase of service parts to support our older product lines. In fiscal 2004 we were required to make a one time bulk purchase of service support parts for our Spectrum product line because our suppliers notified us that they would not continue manufacturing this equipment, as it was not profitable for them to do so. In fiscal 2006, net proceeds from purchases and sales of investments were $2.6 million as compared to net proceeds of $12.4 million in fiscal 2005.

Net cash provided by financing activities in fiscal 2006 was $16.2 million compared to $43.8 million in fiscal 2005. In the third quarter of fiscal 2006, we borrowed $13 million against our credit facility with a commercial bank. This loan was repaid in the fourth quarter of fiscal 2006. In the fourth quarter of fiscal 2006, we borrowed $20 million against our credit facility with a commercial bank. In fiscal 2006, we repaid $6.3 million of a $25 million borrowing from the same bank which was taken in the first quarter of fiscal 2005. Proceeds from the exercise of employee stock options and our employee stock purchase plan in fiscal 2006 was $2.5 million.

As mentioned above, we borrowed $25 million against our credit facility of $35 million with a commercial bank in the first quarter of fiscal 2005. We repaid $5.2 million of this loan in fiscal 2005. In addition, proceeds from the sale of common stock for fiscal 2005 included $22.9 million (net of expenses) raised by issuing 10,327,120 shares of common stock at a price of $2.36 per share and $1.1 million from the exercise of employee stock options and the employee stock purchase plan.

15

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash requirements

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

§	Operations
§	Research and development
§	Restructuring payments
§	Capital expenditures
§	Acquisitions

          Commercial commitments

As of March 31, 2006, we had $6.7 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to various customers. These letters of credit generally expire in fiscal 2007. As of March 31, 2006, we had outstanding forward foreign exchange contracts in the aggregate amount of $31.3 million expiring within 2 months. Also, as of March 31, 2006, we had $0.4 million of cash received in advance from one of our customer which was restricted.

          Contractual obligations

The following table provides information related to our contractual obligations:

Payments due (in thousands):
Years ending March 31,
											2012 &		Total
	2007		2008		2009		2010		2011		beyond		Obligations
Operating leases (a)	$	6,403	$	6,654	$	6,787	$	6,913	$	5,766	$	855	$	33,378
Unconditional purchase obligations (b)	$	42,044		—		—		—		—		—	$	42,044
Long-term debt (c)	$	11,250	$	11,250	$	6,041	$	5,000		—		—	$	33,541

(a)	Contractual cash obligations include $17.4 million of lease obligations that have been accrued as restructuring charges as of March 31, 2006.
(b)	We have firm purchase commitments with various suppliers as of end of March 2006. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for potential cancellation penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We believe we have made adequate provisions for potential exposure related to inventory purchases for orders that may not be utilized.
(c)	See discussion of “repayment of long-term debt” in the following paragraphs.

          Restructuring payments

The remaining accrual balance of $17.9 million as of March 31, 2006, is expected to be paid out in cash. The Company expects $3.4 million of the remaining accrual balance ($0.2 million of severance and benefits, $0.3 million of legal and other costs and $2.9 million of vacated building lease obligations) to be paid out in fiscal 2007 and vacated building lease obligations of $14.5 million to be paid out during fiscal 2008 through fiscal 2012.

16

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          Customer financing

In fiscal 2004, we granted extended terms of credit beyond 12 months to several of our customers in order to position ourselves in certain markets and to promote opportunities for our new Eclipse product line. As of March 31, 2006 we have $0.2 million recorded as long-term accounts receivable due to these extended terms of credit granted to our customers. Although we may commit to provide customer financing to customers in order to position ourselves in certain markets, we remain focused on minimizing our overall customer financing exposures by discounting receivables when possible, raising third party financing and arranging letters of credit.

          Repayment of long-term debt

In the first quarter of fiscal 2005 we borrowed $25 million on a long-term basis against our $35 million secured revolving credit facility with a commercial bank. This loan is payable in equal monthly installments of principal plus interest over a period of four years. The loan is at a fixed interest rate of 6.38%. As of March 31, 2006 we had repaid $11.5 million of this loan.

In the fourth quarter of fiscal 2006, we increased the amount of our credit facility with the bank from $35 million to $50 million and extended the facility for a further one year term to April 30, 2008. We also borrowed an additional $20 million on a long-term basis under the facility with the bank. This loan is payable in equal monthly installments of principal plus interest over a period of four years. The loan is at a fixed interest rate of 7.25%. As of March 31, 2006, no principal had been repaid under the loan.

As part of the credit facility agreement, we have to maintain, as measured at the last day of each fiscal quarter, tangible net worth of at least $54 million plus (1) 25% of net income, as determined in accordance with GAAP (exclusive of losses) and (2) 50% of any increase to net worth due to subordinated debt or net equity proceeds from either public or private offerings (exclusive of issuances of stock under our employee benefit plans) for such quarter and all preceding quarters since December 31, 2005. We also have to maintain, as measured at the last day of each fiscal month, a ratio of (1) total unrestricted cash and cash equivalents plus short-term and long-term marketable securities plus 25% of all accounts receivable due to us minus certain outstanding bank services and reserve for foreign currency contract transactions divided by (2) the aggregate amount of outstanding borrowings and other obligations to the bank, of not less than 1.00 to 1.00 for each month end through May 31, 2006 and 1.25 to 1.00 thereafter. As of March 31, 2006 we were in compliance with these financial covenants of the loan.

Sources of cash:

At March 31, 2006, our principal sources of liquidity consisted of $57.7 million in cash and cash equivalents and short-term investments and $10.7 million available credit under our credit facility of $50 million with a major bank.

          Available credit facility

At the end of March 2006, we had $10.7 million of credit available against our $50 million revolving credit facility with a commercial bank as mentioned above. This credit available is per an amendment to the existing Credit Facility Agreement with the bank effective March 1, 2006 which expanded the amount of credit available under the facility and extended it through April 2008. Per the amended agreement, the total amount of revolving credit available was expanded to $50 million less the outstanding balance of the term debt portion and any usage under the revolving credit portion. The balance of the long-term debt portion of our credit facility was $33.5 million as of March 31, 2006 and there were $5.8 million outstanding standby letters of credit as of that date which are defined as usage under the revolving credit portion of the facility. There were no other outstandings under the short-term debt portion of the facility as of March 31, 2006. As the long-term debt portion is repaid, additional credit will be available under the revolving credit portion of the facility. Short-term

17

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

borrowings under the revolving credit facility will be at the bank’s prime rate, which was 7.75% per annum at March 31, 2006, or LIBOR plus 2%.

We used cash in fiscal 2006 due to increased working capital requirements resulting from the increase in revenues and to support the higher orders and backlog. Days sales outstanding (“DSO”) for receivables improved from 77 days as of March 31, 2005 to 62 days as of March 31, 2006. Our accounts receivable and DSO were primarily affected by timing of shipments and payment terms. Our collections also improved due to the fact that a considerable number of sales in fiscal 2006 were under letters of credit and we were able to discount the related accounts receivable through the international banking system. We expect cash usage to be constrained in fiscal 2007 as our days sales outstanding for receivables is expected to increase back to normal levels of 70 to 75 days.

We believe that our available cash and cash equivalents at March 31, 2006 combined with anticipated receipts of outstanding accounts receivable and our revolving credit facility as explained above should be sufficient to meet our anticipated needs for working capital and capital expenditures through March 31, 2007.

Depending on the growth of our business, we may require additional financing which may not be available to us in the required time frame on commercially reasonable terms, if at all. However, we believe that we have the financial resources needed to meet our business requirements for at least the next 12 months.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk:

          Exposure on Investments

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

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

	Years ending March 31
	(In thousands)
	2007		2008
Cash equivalents and short-term investments (a)		$51,175		$—
Weighted average interest rate		4.44%		0.0%

(a) Does not include cash of $6.5 million held in bank checking and deposit accounts including those held by our foreign subsidiaries.

The primary objective of our short-term investment activities is to preserve principal while at the same time maximize yields, without significantly increasing risk. Our short-term investments are for fixed interest rates;

18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our investments prior to maturity have been immaterial. Investments are generally not held for more than one year. Investments held at March 31, 2006 had an average maturity of 28 days and an average yield of 4.44% per annum. As of March 31, 2006, unrealized losses on investments were immaterial. The investments have been recorded at fair value on our balance sheet.

          Exposure on Borrowings:

Any borrowings under our credit facility will be at an interest rate of the bank’s prime rate or LIBOR plus 2%. At the end of March 2006, we had $10.7 million of credit available against our $50 million revolving credit facility. A hypothetical 10% change in interest rates would not have a material impact on our financial position, results of operations and cash flows.

Exchange Rate Risk:

We routinely use forward foreign exchange contracts to hedge our exposures related to the monetary assets and liabilities of our operations denominated in non-functional currencies. In addition, we enter into forward foreign exchange contracts to establish with certainty the U.S. dollar amount of anticipated transactions denominated in a foreign currency. The primary business objective of this hedging program is to minimize the gains and losses resulting from exchange rate changes. At March 31, 2006 we held forward contracts in various currencies in the aggregate amount of $31.3 million primarily in Thai Baht, Euro and Polish Zloty. The unrealized gains and losses on these contracts at March 31, 2006 were immaterial. Forward contracts are not available in certain currencies and are not purchased by the Company for certain currencies due to the cost. The exchange rate changes in these currencies, such as the Nigerian Naira, could result in significant gains and losses in future periods.

Given our exposure to various transactions in foreign currencies, a change in foreign exchange rates would result in exchange gains and losses. As these exposures are generally covered by forward contracts where such contracts are available, these exchange gains and losses would generally be offset by exchange gains and losses on the contracts designated as hedges against such exposures. We use sensitivity analysis to measure our foreign currency risk by computing the potential loss that may result from adverse changes in foreign exchange rates. The exposure that relates to the hedged firm commitments is not included in the analysis. A hypothetical unfavorable variance in foreign exchange rates of 10% is applied to each net source currency position using year-end rates, to determine the potential loss. Further, the model assumes no correlation in the movement of foreign exchange rates. A 10% adverse change in exchange rates would result in an immaterial potential loss of $0.1 million. This potential loss would result primarily from our exposure to the Nigerian Naira and Argentine Peso.

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

Factors that May Affect Future Financial Results

The Stockholders’ Letter and discussions in this Annual Report concerning our future products, expenses, revenues, gross margins, liquidity, and cash needs, as well as our plans and strategies, contain forward-looking statements concerning our future operations and financial results within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. All statements,

19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

trend analyses and other information contained herein about the markets for our services and products and trends in revenue, as well as other statements identified by the use of forward-looking terminology, including ‘‘anticipate,’’ ‘‘believe,’’ ‘‘plan,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘goal’’ and ‘‘intend’’, or the negative of these terms or other similar expressions, constitute forward-looking statements. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Numerous factors, could cause actual results to differ materially from those described in these statements, as well as harm business in general, including the following:

• We have had a history of losses, and we may not achieve or sustain profitability on a quarterly or annual basis;

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

• Our average sales prices are declining;

• If we do not continue to successfully market our major new product line, Eclipse, our business would be harmed;

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

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

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

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

• Acts of terrorism can negatively impact our revenues;

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

• Our success depends on new product introductions and acceptance;

• Our customers may not pay us in a timely manner, or at all, which would decrease our income and utilize our working capital;

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

• We may breach our covenants relating to our outstanding debt against our $50 million credit facility with a commercial bank resulting in a secured creditor claim action against us by the bank and the inability to obtain future borrowings;

• The inability of our subcontractors to perform, or our key suppliers to manufacture and deliver materials, could cause our products to be produced in an untimely or unsatisfactory manner, or not at all;

• Negative changes in the capital markets available for telecommunications and mobile cellular projects may result in reduced revenues and excess inventory that we cannot sell or may be required to sell at distressed prices, and may result in longer credit terms to our customers;

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

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

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

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

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Changes in Accounting Standards for Share-Based Payments will reduce our future profitability; and

• If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business.

For a more detailed discussion of these risks see Item 1A. “Risk Factors” of our Annual report on Form 10-K for the fiscal year ended March 31, 2006. Prospective investors and stockholders should carefully consider the risk factors set forth in our Annual Report on Form 10-K.

21

SELECTED CONSOLIDATED FINANCIAL DATA

	Years ended March 31,
	2006			2005			2004			2003			2002
	(in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Net sales	$	230,892		$	180,302		$	157,348		$	197,704		$	228,844
Net loss	$	(2,297	)	$	(45,946	)	$	(37,068	)	$	(51,555	)	$	(168,873	)
Basic and diluted loss per share	$	(0.02	)	$	(0.51	)	$	(0.44	)	$	(0.62	)	$	(2.13	)
Basic and diluted weighted average shares outstanding		95,600			89,634			83,364			82,548			79,166

	March 31,
	2006		2005		2004		2003		2002
	(in thousands, except number of employees)
Balance Sheet and other Data:
Total assets	$	180,830	$	160,631	$	163,244	$	184,785	$	214,117
Long-term liabilities	$	37,376	$	32,185	$	20,311	$	19,145	$	6,675
Stockholders’ equity	$	62,343	$	60,023	$	81,182	$	112,800	$	167,457
Total employees		453		456		617		587		760

22

STRATEX NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS

	March 31,
	2006			2005
	(in thousands, except per share amounts)
Assets
Current Assets:
Cash and cash equivalents	$	44,414		$	32,860
Short-term investments		13,272			15,831
Accounts receivable, net of allowance of $2,140 in 2006 and $2,769 in 2005		42,003			35,084
Inventories		43,867			36,780
Other current assets		12,620			10,572
Total current assets		156,176			131,127
Property and Equipment:
Machinery and equipment		77,930			79,156
Land and buildings		6,686			7,550
Furniture and fixtures		7,550			5,575
Leasehold improvements		1,556			1,537
		93,722			93,818
Accumulated depreciation and amortization		(69,673	)		(65,590	)
Net property and equipment		24,049			28,228
Other assets		605			1,276
Total Assets	$	180,830		$	160,631
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	38,725		$	34,472
Short-term debt		11,250			6,250
Accrued liabilities		31,136			27,701
Total current liabilities		81,111			68,423
Long-term debt		22,291			13,542
Restructuring and other long-term liabilities		15,085			18,643
Total liabilities		118,487			100,608
Commitments and Contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $.01 par value; 5,000 shares authorized; none outstanding		—			—
Common stock, $.01 par value; 150,000 shares authorized, 96,931 and 94,918 shares issued and outstanding at March 31, 2006 and 2005, respectively		969			948
Additional paid-in capital		489,370			485,382
Accumulated deficit		(416,022	)		(413,725	)
Accumulated other comprehensive loss		(11,974	)		(12,582	)
Total stockholders’ equity		62,343			60,023
Total Liabilities and Stockholders’ Equity	$	180,830		$	160,631

The accompanying notes are an integral part of these consolidated financial statements.

23

STRATEX NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

	Years ended March 31,
	2006			2005			2004
	(in thousands, except per share amounts)
Net Sales	$	230,892		$	180,302		$	157,348
Cost of sales		167,303			151,398			129,689
Inventory and other valuation charges (benefit)		—			2,581			(498	)
Gross profit		63,589			26,323			28,157
Operating Expenses:
Research and development		14,475			16,661			17,151
Selling, general and administrative		46,792			44,379			39,273
Amortization of intangible assets		—			1,581			790
Restructuring charges		—			7,423			5,488
Total operating expenses		61,267			70,044			62,702
Income (loss) from operations		2,322			(43,721	)		(34,545	)
Other Income (Expense):
Interest income		1,111			737			886
Interest expense		(2,227	)		(1,662	)		(160	)
Other expenses, net		(1,927	)		(845	)		(1,116	)
Total other expense, net		(3,043	)		(1,770	)		(390	)
Loss before provision for income taxes		(721	)		(45,491	)		(34,935	)
Provision for income taxes		1,576			455			2,133
Net Loss	$	(2,297	)	$	(45,946	)	$	(37,068	)
Basic and diluted net loss per share	$	(0.02	)	$	(0.51	)	$	(0.44	)
Shares used to compute basic and diluted net loss per share		95,600			89,634			83,364

The accompanying notes are an integral part of these consolidated financial statements.

24

STRATEX NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Years ended March 31, 2004, 2005 and 2006
										Accumulated
										Other
	Common		Stock		Additional		Accumulated			Comprehensive			Total Stockholders’
	Shares		Amount		Paid-In Capital		Deficit			Loss			Equity
	(in thousands)
Balances March 31, 2003		82,748	$	827	$	457,147	$	(330,711	)	$	(14,463	)	$	112,800
Components of comprehensive income:
Net loss		—		—		—		(37,068	)		—			(37,068	)
Change in unrealized holding gain		—		—		—		—			20			20
Translation adjustment		—		—		—		—			1,081			1,081
Total comprehensive loss														(35,967	)
Shares issued to Tellumat (Pty) Ltd for acquisition of net assets of Plessey Broadband Wireless		730		7		2,950		—			—			2,957
Stock issued for options and purchase plan		570		6		1,386		—			—			1,392
Balances March 31, 2004		84,048	$	840	$	461,483	$	(367,779	)	$	(13,362	)	$	81,182
Components of comprehensive income:
Net loss		—		—		—		( 45,946	)		—			(45,946	)
Change in unrealized holding loss		—		—		—		—			(58	)		(58	)
Translation adjustment		—		—		—		—			838			838
Total comprehensive loss														(45,166	)
Sale of common stock, net of cash and non-cash (warrants) expenses of $1.4 million and $4.1 million, respectively (See note 11)		10,327		103		22,850		—			—			22,953
Stock issued for options and purchase plan		543		5		1,049		—			—			1,054
Balances March 31, 2005		94,918	$	948	$	485,382	$	( 413,725	)	$	(12,582	)	$	60,023
Components of comprehensive loss:
Net loss		—		—		—		(2,297	)		—			(2,297	)
Change in unrealized holding loss		—		—		—		—			31			31
Translation adjustment		—		—		—		—			577			577
Total comprehensive loss														(1,689	)
Stock issued for options and purchase plan		1,117		6		2,488		—			—			2,494
Restricted Stock Awards		896		15		1,500		—			—			1,515
Balances March 31, 2006		96,931	$	969	$	489,370	$	(416,022	)	$	(11,974	)	$	62,343

The accompanying notes are an integral part of these consolidated financial statements.

25

STRATEX NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended March 31,
	2006			2005			2004
	(in thousands)
Cash Flows From Operating Activities:
Net loss	$	(2,297	)	$	(45,946	)	$	(37,068	)
Adjustments to reconcile net loss to net cash used for operating activities:
Non-cash stock compensation charges		1,515			—			—
Depreciation and amortization		7,418			11,460			9,470
Non-cash restructuring charges		—			928			—
Changes in assets and liabilities:
Accounts receivable		(6,445	)		(530	)		(3,721	)
Inventories		(6,385	)		(1,461	)		(6,662	)
Other assets		(1,227	)		1,176			2,035
Accounts payable		4,154			(5,597	)		14,960
Accrued liabilities		3,697			5,998			(3,416	)
Long-term liabilities		(3,559	)		(1,662	)		(3,039	)
Net cash used for operating activities		(3,129	)		(35,634	)		(27,441	)
Cash Flows From Investing Activities:
Purchase of available-for-sale securities		(82,185	)		(83,275	)		(220,983	)
Proceeds from sale of available-for-sale securities		84,753			95,723			248,812
Purchase of property and equipment		(3,532	)		(7,435	)		(10,532	)
Purchase of net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd.		—			—			(2,578	)
Net cash provided by (used for) investing activities		(964	)		5,013			14,719
Cash Flows From Financing Activities:
Borrowings from banks		33,000			25,000			—
Repayment of bank borrowings		(19,250	)		(5,208	)		—
Proceeds from sale of common stock		2,495			24,007			1,392
Net cash provided by financing activities		16,245			43,799			1,392
Effect of exchange rate changes on cash		(598	)		(1,944	)		(1,080	)
Net increase (decrease) in cash and cash equivalents		11,554			11,234			(12,410	)
Cash and cash equivalents at beginning of year		32,860			21,626			34,036
Cash and cash equivalents at end of year	$	44,414		$	32,860		$	21,626

The accompanying notes are an integral part of these consolidated financial statements.

26

STRATEX NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplemental Statements of Cash Flows Disclosures. Cash paid for interest and income taxes for each of the three fiscal years presented in the consolidated statements of cash flows was as follows:

	Years ended March 31,
	2006		2005		2004
	(in thousands)
Interest paid	$	1,097	$	1,781	$	103
Income taxes paid	$	1,430	$	199	$	274

Supplemental Schedule of Non Cash Financing Activities:

	2006		2005		2004
	(in thousands)
Non-cash purchase consideration for the acquisition of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. through the issuance of common stock	$	—	$	—	$	2,957
Issuance of common stock warrants (See Note 11)	$	—	$	4,122	$	—

27

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business

The Company designs, manufactures and markets advanced wireless solutions for mobile applications and broadband access to enable the development of complex communications networks worldwide. The Company’s microwave radio products deliver data and voice across a full spectrum of network frequencies and capacities. The Company’s business is global in nature, supported by a worldwide sales and support organization. Stratex Networks, Inc., formerly known as DMC Stratex Networks, Inc. and Digital Microwave Corporation, was founded in January 1984.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation. The consolidated financial statements include the accounts of Stratex Networks, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Cash and Cash Equivalents. The Company generally considers all highly liquid debt instruments with a remaining maturity of three months or less at the time of purchase, to be cash equivalents. Auction rate preferred securities are classified as short-term investments. Cash and cash equivalents consisted of cash, money market funds, and short-term securities as of March 31, 2006 and March 31, 2005. As of March 31, 2006, we had $0.4 million of cash received in advance from one of our customers which was restricted.

Short-Term Investments. The Company invests its excess cash in high-quality and easily marketable instruments to ensure cash is readily available for use in current operations. Accordingly, all marketable securities are classified as “available-for-sale” in accordance with the provisions of the Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). At March 31, 2006, the Company’s available-for-sale securities had contractual maturities ranging from 1 month to 6 months, with a weighted average maturity of 28 days.

All investments are reported at fair market value with the related unrealized holding gains and losses reported as a component of stockholders’ equity. The realized gains on the sale of securities during fiscal 2006, 2005 and 2004 were insignificant. Realized gains (losses) are included in other expenses, net in the accompanying consolidated statement of operations.

28

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of available-for-sale short-term investments as of March 31, 2006:

	2006
					Unrealized
	Cost		Fair Value		Holding Loss
	(in thousands)
Corporate notes	$	2,083	$	2,083	$	—
Corporate and Government bonds		3,605		3,589		(16	)
Auction rate preferred notes		7,600		7,600		—
Total	$	13,288	$	13,272	$	(16	)

The following is a summary of available-for-sale short-term investments as of March 31, 2005:

	2005
					Unrealized
	Cost		Fair Value		Holding Loss
	(in thousands)
Corporate notes	$	749	$	749	$	—
Corporate and Government bonds		9,578		9,532		(46	)
Auction rate preferred notes		5,550		5,550		—
Total	$	15,877	$	15,831	$	(46	)

Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market, where cost includes material, labor, and manufacturing overhead. Inventories consisted of:

	March 31,
	2006		2005
	(in thousands)
Raw materials	$	9,012	$	11,065
Work-in-process		—		488
Finished goods		34,855		25,227
	$	43,867	$	36,780

In fiscal 2005, the Company recorded inventory valuation charges of $2.6 million for excess inventories not expected to be sold. There were no inventory valuation charges recorded in fiscal 2006.

Property and Equipment. Property and equipment is stated at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the assets (ranging from three to five years for equipment and furniture, and forty years for buildings) or the lease term. Depreciation and amortization are reported in the applicable captions in the statement of operations based on the functional area that utilizes the related equipment and facilities. Any depreciation related to production facilities is therefore recorded as a component of cost of sales.

29

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Assets. Included in other assets as of March 31, 2006 are long-term deposits of $0.4 million for premises leased by the Company and $0.2 million for long-term accounts receivable. The long-term accounts receivable is due to the extended terms of credit granted by the Company to one of its customers in order to position itself favorably in certain markets. Included in other assets as of March 31, 2005 are long-term deposits of $0.4 million for premises leased by the Company and $0.9 million for long-term accounts receivable.

Accumulated Other Comprehensive Income. SFAS No. 130, “Reporting Comprehensive Income,” (SFAS 130”) establishes standards for reporting and display of comprehensive income (loss) and its components. SFAS 130 requires companies to report comprehensive income (loss), which includes unrealized holding gains and losses and other items that have previously been excluded from net income (loss) and reflected instead in stockholders’ equity. The Company’s comprehensive loss consists of net loss plus the effect of unrealized holding gains or losses on investments classified as available-for-sale and foreign currency translation adjustments.

The accumulated balances for each component of accumulated other comprehensive income (loss) are as follows:

	March 31,
	2006			2005
	(in thousands)
Unrealized holding loss on available-for-sale-securities	$	(16	)	$	(46	)
Cumulative foreign exchange translation adjustment		(11,958	)		(12,536	)
Accumulated other comprehensive loss	$	(11,974	)	$	(12,582	)

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

Determination of the functional currency is dependent upon the economic environment in which an entity operates as well as the customers and suppliers the entity conducts business with. Changes in the facts and circumstances may occur and could lead to a change in the functional currency of that entity.

Gains and losses resulting from foreign exchange transactions and the costs of foreign currency contracts are included in other income (expense) in the accompanying consolidated statements of operations. Net foreign exchange losses of $1.8 million, $0.6 million and $0.8 million were recorded in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.

30

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

We manufacture and sell products internationally subjecting us to currency risk. Derivatives are employed to eliminate, reduce, or transfer selected foreign currency risks that can be identified and quantified. The primary business objective of this hedging program is to minimize the gains and losses resulting from exchange rate changes. The Company’s policy is to hedge forecasted and actual foreign currency risk with forward contracts that expire within twelve months. Foreign currency contracts to hedge exposures are not available in certain currencies, such as the Nigerian Naira. Specifically, the Company hedges foreign currency risks relating to firmly committed backlog, open purchase orders and non-functional currency monetary assets and liabilities. Derivatives hedging non-functional currency monetary assets and liabilities are recorded on the balance sheet at fair value and changes in fair value are recognized currently in earnings.

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

The following table summarizes the activity in OCI, with regard to the changes in fair value of derivative instruments, for fiscal 2006 and fiscal 2005 (in thousands):

	Twelve			Twelve
	Months Ended			Months Ended
	March 31, 2006			March 31, 2005
	Gains/(Losses)			Gains/(Losses)
Beginning balance as of April 1	$	90		$	23
Net changes		(772	)		644
Reclassifications to revenue		573			(526	)
Reclassifications to cost of sales		2			(51	)
Ending balance as of March 31	$	(107	)	$	90

A loss of $0.2 million in each of the fiscal years ending 2005 and 2004, and a loss of $0.1 million in fiscal 2006 was recognized in other income and expense related to the exclusion of time value from effectiveness testing. The gain/loss resulting from forecasted transactions that did not occur in fiscal 2006, fiscal 2005 and fiscal 2004 was insignificant.

Revenue Recognition. The Company recognizes revenue pursuant to Staff Accounting Bulletin No. 104 (SAB 104) “Revenue Recognition”. Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that the arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.

Revenues from product sales are generally recognized when title and risk of loss passes to the customer, except when product sales are combined with significant post-shipment installation services. Under this exception, revenue is deferred until such services have been performed. Installation service revenue is recognized when the related services are performed.

31

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

When sales are made under payment terms beyond the normal credit terms, revenue is recognized only when cash is collected from the customer unless the sale is covered by letters of credit or other bank guarantees. Revenue from service obligations under maintenance contracts is deferred and recognized on a straight-line basis over the contractual period, which is typically one year.

In fourth quarter of fiscal 2006, the Company entered into a four year agreement with Alcatel to license certain Eclipse software and products to Alcatel. Alcatel will pay the Company a license fee based on the dollar value of Alcatel’s quarterly purchases from the Company’s contract manufacturers. There is a minimum quarterly license fee that will be recognized as revenue in the fiscal quarter it is invoiced. License fees beyond the quarterly minimum will be recognized as revenue in the quarter when they are invoiced, due and payable.

Included in the agreement are certain additional support services that may be provided by the Company to Alcatel. In accordance with Emerging Issues Task Force (“EITF”) 00-21 “Revenue Arrangements with Multiple Deliverables” the Company determined that revenue related to these services should be recognized separately from the license fee and accordingly will be recognized when the services are performed.

Research and Development. All research and development costs are expensed as incurred.

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

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

	Years ended March 31,
	2006			2005			2004
	(in thousands, except per share amounts)
Net loss – as reported	$	(2,297	)	$	(45,946	)	$	(37,068	)
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(4,954	)		(11,630	)		(9,961	)
Net loss – pro forma	$	(7,251	)	$	(57,576	)	$	(47,029	)
Basic and diluted loss per share – as reported	$	(0.02	)	$	(0.51	)	$	(0.44	)
Basic and diluted loss per share – pro forma	$	(0.08	)	$	(0.64	)	$	(0.56	)

32

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Years ended March 31,
	2006			2005			2004
Expected dividend yield		0.0	%		0.0	%		0.0	%
Expected stock volatility		96.2	%		96.8	%		96.6	%
Risk-free interest rate		3.9 – 4.6	%		2.7 – 3.9	%		2.2 – 3.3	%
Expected life of options from vest date		1.8 years			1.5 years			1.7 years
Forfeiture rate		Actual			Actual			Actual

The fair value of each share granted under the employee stock purchase plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Years ended March 31,
	2006			2005			2004
Expected stock volatility		55.7	%		75.7	%		89.6	%
Risk-free interest rate		2.9	%		1.6	%		1.0	%
Expected life of options from vest date		0.3 years			0.3 years			0.2 years

The weighted average fair value of stock options granted during fiscal 2006, fiscal 2005 and fiscal 2004 was $2.04, $1.53 and $3.05 respectively.

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

As of March 31, 2006, there were 1,531,176 weighted-average options outstanding to purchase shares of common stock that were not included in the computation of diluted earnings per share because they were anti-dilutive as a result of the net loss incurred in fiscal 2006. As of March 31, 2005, there were 870,000 weighted-average options outstanding to purchase shares of common stock that were not included in the computation of diluted earnings per share because they were anti-dilutive as a result of the net loss incurred in fiscal 2005. As of March 31, 2004, there were 2,399,000 weighted-average options outstanding to purchase shares of common stock that were not included in the computation of diluted earnings per share because they were anti-dilutive as a result of the net loss incurred in fiscal 2004.

Income Taxes. The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes, and such amounts recognized for income tax reporting purposes, and operating loss and other tax credit carry forwards measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized in the future.

33

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements. In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No.155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”) an amendment to SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155, provides the framework for fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation as well as establishes a requirement to evaluate interests in securitized financial assets to identify interests. SFAS 155 further amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The SFAS 155 guidance also clarifies which interest-only strips and principal-only strips are not subject to the requirement of SFAS 133 and concentrations of credit risk in the form of subordination are not embedded derivatives. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. SFAS 155 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No.154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements of the accounting for and reporting of a change in accounting principle. SFAS No. 154 also provides guidance on the accounting for and reporting of error corrections. The provisions of this statement are applicable for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material impact on the Company’s results of operations or financial condition.

In March 2005, FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. Interpretation No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of the fiscal year ending after December 15, 2005. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107, which provides guidance on the implementation of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (see discussion below). In particular, SAB No. 107 provides key guidance related to valuation methods (including assumptions such as expected volatility and expected term), the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to the adoption of SFAS No. 123(R), the classification of compensation expense, capitalization of compensation cost related to share-based payment arrangements, first-time adoption of SFAS No. 123(R) in an interim period, and disclosures in Management’s Discussion and Analysis subsequent to the adoption of SFAS No. 123(R). SAB No. 107 became effective on March 29, 2005. The Company will apply the principles of SAB No. 107 in conjunction with its adoption of SFAS 123(R).

34

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)). This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the fair value of stock options. SFAS No. 123(R) was to be effective for quarterly periods beginning after June 15, 2005, which is the Company’s first quarter of fiscal 2006. In April 2005, the SEC delayed the required compliance date for certain public companies to fiscal years beginning after June 15, 2005. Accordingly, the Company will be required to comply with SFAS No. 123(R) in fiscal 2007. While the Company currently provides the pro forma disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure,” on a quarterly basis (see “Note 2 — Stock-Based Compensation”), it is currently evaluating the impact this statement will have on its consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

Note 3. Acquired Intangible Assets

The Company recorded expense on amortization of intangible assets of $1.6 million and $0.8 million in fiscal 2005 and fiscal 2004, respectively. In fiscal 2004, the Company acquired the net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. (“Tellumat”) located in Cape Town, South Africa. As part of the purchase agreement the Company acquired $2.4 million of intangible assets. This $2.4 million of intangible assets has been assigned to intellectual property and was estimated to have a useful life of 18 months. In the third quarter of fiscal 2005, the Company accelerated amortization of the intangible assets due to the shut down of the Cape Town operations and redesign of the product acquired from Plessey Broadband Wireless. The Company amortized the entire balance of intangible assets in fiscal 2005.

Note 4. Concentration of Credit Risk

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

Accounts receivable concentrated with certain customers primarily in the telecommunications industry and in certain geographic locations may subject the Company to concentration of credit risk. The following table summarizes the number of our significant customers as a percentage of our accounts receivable balance at March 31, 2006 and March 31, 2005, along with the percentage of accounts receivable balance they individually represent. No other customer accounted for more than 10% of the accounts receivable balance at the dates indicated.

35

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	March 31, 2006			March 31, 2005
Number of significant customers		2			—
Percentage of accounts receivable balance		12%, 10	%		—

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

	Years ended March 31,
	2006			2005			2004
Number of significant customers		1			1			1
Percentage of net sales		10	%		21	%		19	%

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

Note 5. Other Current Assets

Other current assets include the following :

	March 31,
	2006		2005
	(in thousands)
Receivables from suppliers	$	3,074	$	2,566
Non-trade receivables		947		851
Prepaid expenses		4,165		3,529
Prepaid insurance		395		340
Income tax and VAT refund		3,795		2,976
Other		244		310
	$	12,620	$	10,572

Prepaid expenses as of March 31, 2006 and March 31, 2005 also included installation costs of $0.8 million and $1.3 million, respectively, incurred for customers, which are being deferred because revenue related to these costs was not yet recognized.

36

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Accrued Liabilities

Accrued liabilities include the following:

	March 31,
	2006		2005
	(in thousands)
Customer deposits	$	2,103	$	1,822
Accrued payroll and benefits		2,628		2,250
Accrued commissions		4,660		2,117
Accrued warranty		4,395		5,340
Accrued restructuring		3,373		4,902
Accrual for customer discount		4,359		3,688
Deferred revenue		3,193		1,279
Other		6,425		6,303
	$	31,136	$	27,701

The accrual for customer discount of $4.4 million and $3.7 million as of March 31, 2006 and March 31, 2005, respectively is for discount on certain volume levels reached by a customer.

37

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Long –term debt

On May 27, 2004 the Company borrowed $25 million on a long-term basis against its $35 million credit facility with a commercial bank. This $25 million loan is payable in equal monthly installments of principal plus interest over a period of four years. This loan bears interest at a fixed interest rate of 6.38% per annum. As of March 31, 2006 the Company has repaid $11.5 million of the loan.

In February 2006, the Company increased the amount of its credit facility with the bank from $35 million to $50 million and extended the facility for an additional one year term to April 30, 2008. The Company also borrowed an additional $20 million on a long-term basis under the facility with the bank on March 1, 2006. This loan is payable in equal monthly installments of principal plus interest over a period of four years. The loan is at a fixed interest rate of 7.25%. As of March 31, 2006, no principal had been repaid under the new term loan.

As part of the credit facility agreement, there is a tangible net worth covenant and a liquidity ratio covenant. As of March 31, 2006 the Company was in compliance with these financial covenants of the loan.

At March 31, 2006, future long-term debt payment obligations were as follows:

Years ending March 31,
(in thousands)
2007	$	11,250
2008		11,250
2009		6,041
2010		5,000
Total	$	33,541

At the end of March 2006, the Company had $10.7 million of credit available against our $50 million revolving credit facility with a commercial bank as mentioned above. Per the amended agreement, the total amount of revolving credit available was expanded to $50 million less the outstanding balance of the term debt portion and any usage under the revolving credit portion. As of March 31, 2006, the balance of the long-term debt portion of our credit facility was $33.5 million and there were $5.8 million in outstanding standby letters of credit as of that date which are defined as usage under the revolving credit portion of the facility.

Note 8. Restructuring charges.

The Company did not record any restructuring charges in fiscal 2006.

In fiscal 2005, the Company recorded $7.4 million of restructuring charges. In order to reduce expenses and increase operational efficiency, the Company implemented a restructuring plan in the third quarter of fiscal 2005 which included the decision to shut down operations in Cape Town, South Africa, outsource the manufacturing at the New Zealand and Cape Town, South Africa locations and spin off the sales and service offices in Argentina, Colombia and Brazil to independent distributors. As part of the restructuring plan, the Company reduced the workforce by 155 employees and recorded restructuring charges for employee severance and benefits of $3.8 million in fiscal 2005. The Company also recorded $2.3 million for building lease obligations, $0.8 million for fixed asset write-offs and $0.5 million for legal and other costs.

38

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In fiscal 2004, the Company recorded $5.5 million of restructuring charges. The Company reduced the workforce by 34 employees and recorded restructuring charges for employee severance and benefits of $0.9 million. The remaining $4.6 million of restructuring charges was for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003.

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

The following table summarizes the activity relating to restructuring charges for the three years ended March 31, 2006 (in millions):

	Severance			Facilities
	and Benefits			and Other			Total
Balance as of March 31, 2003	$	1.5		$	22.7		$	24.2
Provision in fiscal 2004		0.9			4.6			5.5
Cash payments		(1.3	)		(5.6	)		(6.9	)
Balance as of March 31, 2004		1.1			21.7			22.8
Provision in fiscal 2005		3.8			3.6			7.4
Cash payments		(3.8	)		(4.0	)		(7.8	)
Non-cash expense		—			(0.6	)		(0.6	)
Reclassification of related rent accruals		—			1.2			1.2
Balance as of March 31, 2005		1.1			21.9			23.0
Provision in fiscal 2006		—			—			—
Cash payments		(1.2	)		(3.6	)		(4.8	)
Reclassification		0.3			(0.6	)		(0.3	)
Balance as of March 31, 2006	$	0.2		$	17.7		$	17.9
Current portion	$	0.2		$	3.2		$	3.4
Long-term portion		—			14.5			14.5

The remaining accrual balance of $17.9 million as of March 31, 2006, is expected to be paid out in cash. The Company expects $3.4 million of the remaining accrual balance ($0.2 million of severance and benefits, $0.3 million of legal and other costs and $2.9 million of vacated building lease obligations) to be paid out in fiscal 2007 and vacated building lease obligations of $14.5 million to be paid out during fiscal 2008 through fiscal 2012.

39

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Commitments and Contingencies

The Company leases certain property and equipment, as well as its headquarters and manufacturing facilities, under non-cancelable operating leases that expire at various periods through 2012. At March 31, 2006, future minimum payment obligations under these leases were as follows:

	Years ending March 31,
	(in thousands)
2007	$	6,403
2008		6,654
2009		6,787
2010		6,913
2011		5,766
2012 and beyond		855
Future minimum lease payments (a)	$	33,378

(a) Future minimum lease payments include $17.4 million of lease obligations that have been accrued as restructuring charges as of March 31, 2006.

Rent expense under operating leases was $2.3 million for the year ended March 31, 2006, $4.0 million for the year ended March 31, 2005, and $4.5 million for the year ended March 31, 2004.

Legal Contingencies. The Company is a party to various legal proceedings that arise in the normal course of business. In the opinion of management, the ultimate disposition of these proceedings will not have a material adverse effect on its consolidated financial position, liquidity, or results of operations.

Contingencies in Manufacturing and Suppliers. Purchases for materials are highly dependent upon demand forecasts from the Company’s customers. Due to the uncertainty in demand from its customers, and in the telecommunications market in general, the Company may have to change, reschedule, or cancel purchases or purchase orders from its suppliers. These changes may lead to vendor cancellation charges on these purchase commitments. As of end of March 2006, the Company had purchase commitments of $42 million.

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

40

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The changes in the warranty reserve balances are as follows:

	Years ended March 31,
	2006			2005			2004
	(in thousands)
Balance at the beginning of the year	$	5,340		$	4,277		$	4,219
Additions related to current period sales		5,202			7,282			7,416
Warranty costs incurred in the current period		(5,330	)		(5,227	)		(7,207	)
Adjustments to accruals related to prior period sales		(817	)		(992	)		(151	)
Balance at the end of the year	$	4,395		$	5,340		$	4,277

Note 10. Income Taxes

The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable.

The domestic and foreign components of loss before provision for income taxes were as follows:

	Years ended March 31,
	2006			2005			2004
	(in thousands)
Domestic	$	(1,732	)	$	(34,780	)	$	(29,897	)
Foreign		1,011			(10,711	)		(5,038	)
	$	(721	)	$	(45,491	)	$	(34,935	)

The provision for income taxes consisted of the following:

	Years ended March 31,
	2006		2005		2004
	(in thousands)
Current:
Federal	$	—	$	—	$	—
State		8		80		46
Foreign		1,568		375		344
Total current		1,576		455		390
Deferred- foreign		—		—		1,743
	$	1,576	$	455	$	2,133

41

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate as follows:

	Years ended March 31,
	2006			2005			2004
	(in thousands)
Expected tax benefit	$	(252	)	$	(15,808	)	$	(12,227	)
State taxes, net of Federal benefit		8			(565	)		335
Change in valuation allowance		(1,854	)		10,202			16,775
Foreign taxes		1,568			375			344
Other		2,107			6,251			(3,094	)
	$	1,576		$	455		$	2,133

The major components of the net deferred tax asset consisted of the following:

	March 31,
	2006			2005
	(in thousands)
Inventory write offs	$	13,469		$	10,585
Restructuring reserves		6,810			8,610
Warranty reserves		1,483			1,763
Bad debt reserves		763			1,007
Net operating loss carry forwards		151,821			147,370
Tax credits		12,096			12,650
Impairment of investments		1,128			8,404
Depreciation reserves		426			(300	)
Other		11,166			5,137
		199,162			195,226
Less: Valuation allowance		(199,162	)		(195,226	)
Net deferred tax asset	$	—		$	—

The valuation allowance provides a reserve against deferred tax assets that may expire or go unutilized. In accordance with SFAS No. 109, “Accounting for Income Taxes”, the Company believes it is more likely than not that it will not fully realize these benefits and, accordingly, has continued to provide a valuation allowance for them. The valuation allowance increased by approximately $3.9 million during the year ended March 31, 2006.

At March 31, 2006, the Company had U.S. Federal and State net operating loss carry forwards available to offset future taxable income, if any, of approximately $396.0 million and $78.9 million, respectively. The net operating losses expire in various years through 2026. The Company also had Federal and State capital loss carry forwards available to offset future capital gains, if any, of approximately $19.4 million and $7.3 million, respectively. The capital loss carry forwards expire in various years through 2011. Tax credits include approximately $9.2 million of Federal minimum tax and State research credits that carry forward indefinitely. The remaining tax credits of $5.1 million are Federal and State credits that expire in various years through 2026. The Internal Revenue Code contains provisions that may limit the net operating loss and credit carry forwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership interest.

42

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.

Note 11. Common Stock

Stock Option Plans. The Company grants options to employees under several stock option plans. The Company’s 1984 Stock Option Plan (the “1984 Plan”) provides for the grant of both incentive and nonqualified stock options to its key employees and certain independent contractors. Upon the adoption of its 1994 Stock Incentive Plan (“the 1994 Plan”), the Company terminated future grants under the 1984 Plan. The 1994 Stock Incentive Plan terminated in July 2004.

In April 1996, the Company adopted the 1996 Non-Officer Employee Stock Option Plan (the “1996 Plan”). The 1996 Plan authorizes 1,000,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with the Company. The 1996 Plan will terminate on the date on which all shares available have been issued.

In November 1997, the Company adopted the 1998 Non-Officer Employee Stock Option Plan (the “1998 Plan”), which became effective on January 2, 1998. The 1998 Plan authorizes 500,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with the Company. The 1998 Plan will terminate on the date on which all shares available have been issued.

The 1999 Stock Incentive Plan (the “1999 Incentive Plan”), approved by the Company’s stockholders in August 1999, provides for the issuance of stock options covering up to 2,500,000 shares of its Common Stock. In August 2001, the stockholders approved the reservation for issuance of 4,000,000 additional shares of Common Stock under the 1999 Incentive Plan. The 1999 Incentive Plan enables the Company to grant options as needed to retain and attract talented employees. Options generally vest over four years and expire after 10 years. The 1999 Plan will terminate on the date on which all shares available have been issued.

In August 2002, the shareholders approved the 2002 Stock Incentive Plan, which provides for the issuance of stock options and grants of the Company’s common stock covering up to 10,000,000 shares of its common stock. The purposes of the plan are to give the Company’s employees and others who perform substantial services for the Company an incentive, through ownership of its common stock. The plan permits the grant of awards to the Company’s directors, officers, consultants and other employees. The awards may be granted subject to vesting schedules and restrictions on transfer. The 2002 Stock Incentive Plan also contains two separate equity incentive programs, (i) a non-employee director option program under which option grants will be made at specified intervals to non-employee directors of the Company’s board of directors and (ii) a non-employee director stock program under which non-employee directors of the Company’s board may elect to apply all or a portion of their annual retainer and meeting fees to the purchase of shares of the Company’s common stock. The 2002 Stock Incentive Plan will terminate in August 2009, unless previously terminated by the Company’s board of directors.

At March 31, 2006, the Company had reserved 7,817,904 shares for future issuance under all stock option plans for which there were options available for grant.

In accordance with the provisions of SFAS No. 123 (“SFAS 123”), the Company has applied Accounting Principles Board Opinion No. 25, (“APB 25”), and related interpretations in accounting for its stock option

43

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

plans, and has disclosed the summary of the pro forma effects on reported net loss and loss per share information for fiscal 2005, 2004, and 2003, based on the fair market value of the options granted at the grant date as prescribed by SFAS 123. See Note 2 for the proforma disclosure required under SFAS 123.

The following table summarizes the Company’s stock option activity under all of its stock option plans:

	2006					2005					2004
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price
	(shares in thousands)
Options outstanding at beginning of year		11,819		$	6.01		13,175		$	5.85		12,258		$	8.57
Granted		1,473			2.04		192			2.43		4,581			4.60
Exercised		(823	)		2.32		(122	)		2.06		(189	)		2.18
Expired or canceled		(1,111	)		6.28		(1,426	)		4.40		(3,475	)		14.02
Options outstanding at end of year		11,358		$	5.74		11,819		$	6.01		13,175		$	5.85
Exercisable at end of year		9,243					6,955					4,488
Weighted average fair value of options granted	$	2.04				$	1.53				$	3.05

The following summarizes the stock options outstanding at March 31, 2006:

		Options Outstanding						Options Exercisable
				Weighted
				Average
				Remaining		Weighted				Weighted
Actual Range of		Number		Contractual Life		Average		Number		Average
Exercise Prices		Outstanding		(years)		Exercise Price		Exercisable		Exercise Price
		(shares in thousands)
$	0.23 – 1.72		1,117		6.07	$	1.70		1,103	$	1.71
	1.74 – 2.01		1,343		3.51		1.99		1,123		2.01
	2.02 – 2.05		1,860		3.71		2.05		1,479		2.05
	2.11 – 4.38		2,976		4.80		4.13		1,579		4.07
	4.51 – 5.36		1,149		2.88		5.20		1,046		5.22
	5.38 – 7.25		1,485		4.35		6.44		1,485		6.44
	9.00 – 21.69		810		2.06		12.79		809		12.79
	30.06 – 37.00		618		4.11		30.15		618		30.15
$	0.23 – 37.00		11,358		4.11	$	5.74		9,243	$	6.23

Employee Stock Purchase Plans. The Company has an Employee Stock Purchase Plan which was adopted in June 1999 (the “1999 Purchase Plan”) under which all employees, subject to certain restrictions, may purchase Common Stock under the Purchase Plan through payroll withholding at a price per share of 85% of the fair market value at the beginning or end of the purchase period, as defined under the terms of the 1999 Purchase Plan. As of March 31, 2006 there were approximately 0.9 million shares reserved for issuance under this plan.
The following table summarizes shares sold under the 1999 Purchase Plan at the end of each period indicated.

44

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Years ending
	March 31,
	(shares)
2000		93,189
2001		111,441
2002		318,227
2003		409,044
2004		343,222
2005		364,883
2006		293,627
		1,933,633

Restricted Stock Plan. On June 15, 2005, the Company granted 906,575 of shares of Common Stock to its employees under its 2002 Stock Incentive Plan. Per the plan the shares vest a minimum of one third annually for the next three fiscal years. In addition, the vesting schedule is subject to certain acceleration and adjustments if any or all of the performance goals defined in the Restricted Stock Award Agreement (“the agreement”) are achieved.

In fiscal 2006, all the shares (net of forfeitures) granted under this plan vested due to achievement of certain performance goals. The following table summarizes shares vested upon achievement of certain performance goals defined in the agreement and related compensation expenses at the end of each period indicated.

	Three Months Ending,
	(In thousands, except per share)
	March 31,		December 31,		September 30,		June 30
	2006		2005		2005		2005		Total
Number of shares vested		35,293		178,435		543,945		133,838		891,511
Price per share at date of grant	$	1.70	$	1.70	$	1.70	$	1.70	$	1.70
Compensation expense	$	59	$	303	$	925	$	228	$	1,515

On March 31, 2006, the Company granted an additional 637,544 shares of Common Stock to its employees under its 2002 Stock Incentive Plan. Per the plan a minimum of 50% of shares will vest by March 31, 2008. In addition, the vesting schedule is subject to certain acceleration and adjustments if any or all of the performance goals defined in the Restricted Stock Award Agreement (“the agreement”) are achieved during the period beginning April 1, 2006 and ending March 31, 2007 (the “Performance Period”). If more than 50% of the shares vest based upon achievement of the performance goals for the Performance Period then any shares which have not vested based upon achievement of the performance goals for the Performance Period shall automatically be forfeited and no additional shares will vest on March 31, 2008.

Stock Warrants. During fiscal 2005, the Company raised $22.9 million cash (net of expenses of $1.4 million) by issuing 10,327,120 shares of common stock at a price of $2.36 per share. In connection with the closing of this sale of shares on September 24, 2004, the Company issued 2,581,780 warrants to purchase up to 2,581,780 shares of the Company’s common stock at an exercise price of $2.95 per share as an incentive to invest in the Company. The warrants expire five years from the date of issue. The Company allocated $4.1 million of the

45

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sales price to the warrants based on the relative fair value of the warrants. The value of the warrants was determined using the Black-Scholes option-pricing model and the following weighted average assumptions: contractual term of five years from date of grant, risk free interest rate of 3.36%, volatility of 96.74%, and expected dividend yield of 0%.

Note 13. Benefit plans

The Company has certain defined contribution plans for which the expense amounted to $0.4 million in each of fiscal 2006, fiscal 2005, and fiscal 2004. The Company’s contributions to the savings plan are based upon a certain percentage of the employees’ elected contributions.

Note 14. Operating Segment and Geographic Information

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about products, geographic information, and major customers. Operating segment information for fiscal 2006, 2005, and 2004 is presented in accordance with SFAS 131.

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

The Products operating segment includes the Eclipse™, XP4™, Altium^®, DXR^® and Velox™ digital microwave systems for digital transmission markets. The Company began commercial shipments of a new wireless platform consisting of an Intelligent Node Unit and a radio element, which combined are called Eclipse™ (“Eclipse”), in January 2004. The Company designs and develops the above products in Wellington, New Zealand and San Jose, California. Prior to June 30, 2002, the Company manufactured the XP4 and Altium family of digital microwave radio products in San Jose, California. In June 2002, the Company entered into an agreement with Microelectronics Technology Inc. (MTI), a Taiwanese company, for outsourcing of the Company’s XP4 and Altium products manufacturing operations. In the third quarter of fiscal 2005, the Company outsourced its DXR manufacturing operations in New Zealand to GPC in Australia and Velox manufacturing operations in Cape Town, South Africa to Benchmark Electronics in Thailand.

The Services operating segment includes, but is not limited to, installation, repair, spare parts, network design, path surveys, integration, and other revenues. The Company maintains regional service centers in Lanarkshire, Scotland and Clark Field, Pampanga, Philippines.

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

46

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Years ended March 31,
	2006			2005			2004
	(in thousands)
Products
Revenues	$	198,188		$	151,616		$	129,093
Operating loss		(3,692	)		(47,064	)		(39,987	)
Services and other
Revenues		32,704			28,686			28,255
Operating income		6,014			3,343			5,442
Total
Revenues	$	230,892		$	180,302		$	157,348
Operating income (loss)		2,322			(43,721	)		(34,545	)

Revenues by product from unaffiliated customers for fiscal 2006, 2005, and 2004 are as follows:

	2006		2005		2004
	(in thousands)
Eclipse	$	134,479	$	39,599	$	3,348
XP4		19,417		64,125		57,497
DXR		14,777		16,120		23,917
Altium		19,730		23,985		39,613
Other products		9,785		7,787		4,718
Total Products	$	198,188	$	151,616	$	129,093
Total Services and other		32,704		28,686		28,255
Total Revenue	$	230,892	$	180,302	$	157,348

47

STRATEX NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenues by geographic region from unaffiliated customers fiscal 2006, 2005, and 2004 are as follows:

	Years ended March 31,
	(In Thousands)
			% of					% of					% of
	2006		Total			2005		Total			2004		Total
United States	$	11,235		5	%	$	11,446		6	%	$	6,294		4	%
Other Americas		23,676		10	%		23,839		13	%		18,890		12	%
Russia		15,684		7	%		35,456		20	%		14,689		9	%
Poland		25,905		11	%		10,811		6	%		5,896		4	%
Other Europe		32,766		14	%		22,144		12	%		30,269		19	%
Middle East		26,498		12	%		17,520		10	%		16,416		11	%
Nigeria		19,090		8	%		10,081		6	%		25,705		16	%
Other Africa		18,034		8	%		16,963		9	%		9,824		6	%
Bangladesh		22,301		10	%		1,637		1	%		—		—
Other Asia/Pacific		35,703		15	%		30,405		17	%		29,365		19	%
Total Revenues	$	230,892		100	%	$	180,302		100	%	$	157,348		100	%

Long-lived assets consisted primarily of property and equipment at March 31, 2006 and 2005. Net property and equipment by location was as follows:

	2006		2005
	(in thousands)
United States	$	3,698	$	4,774
United Kingdom		14,193		15,778
New Zealand		3,648		4,630
Other foreign countries		2,510		3,046
Net property and equipment	$	24,049	$	28,228

48

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Stratex Networks, Inc.
San Jose, California

We have audited the accompanying consolidated balance sheets of Stratex Networks, Inc. and subsidiaries (“the Company”) as of March 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stratex Networks, Inc. and subsidiaries as of March 31, 2006 and 2005, and the results of their operations, stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 14, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

/s/DELOITTE & TOUCHE LLP

San Jose, California
June 14, 2006

49

Management’s Report on Internal Control over Financial Reporting

     Our management, with the participation of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal controls are designed to provide reasonable assurance to our management and members of our Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP).

     Our management performed an assessment of our internal controls over financial reporting as of March 31, 2005 and identified the following two material weaknesses in internal control over financial reporting existing as of March 31, 2005. For the March 31, 2005 reporting period, management concluded that the Company 1) did not maintain effective controls over the determination of revenue recognition for a non-routine complex revenue transaction and 2) did not have enough review procedures on the financial closing and reporting process. Management believes that in fiscal 2006 we have remediated the weakness related to revenue recognition due to the expansion of internal review and clarification of internal policies which have been distributed to finance personnel worldwide. With respect to the weakness related to inadequate review of the financial statements of the foreign operations and the period-end financial closing and reporting process for the Company’s consolidated operations, we have identified, developed and began to implement a number of measures to strengthen our internal control in this area. These measures included: hiring additional finance personnel, expanding financial statement reviews, establishing internal audit with a focus on the adequacy of internal controls over financial reporting and expanding the review of manual journal entries.

     However, as a result of our assessment of our financial controls over financial reporting as of March 31, 2006, we have concluded that we have not remediated the material weakness in internal controls over the review of the financial statements of the foreign operations and the period-end financial closing and reporting process for the Company’s consolidated operations. We are taking further steps in fiscal 2007, including the increasing of staff in corporate finance, adding finance staffing at several foreign subsidiaries and expanded subsidiary financial reporting with a goal of having this material weakness remediated by the third quarter of fiscal 2007. We will continue reviewing our internal controls over the financial close and reporting process, and will implement additional controls as needed.

     Deloitte & Touche LLP, an independent registered public accounting firm, has issued a report on management’s assessment of our internal control over financial reporting. That report appears below.

Changes in Internal Control over Financial Reporting

     In connection with our implementation of the provisions of Section 404 of Sarbanes-Oxley of 2002, we have made and will continue to make various improvements to our system of internal controls. We continue to review, revise and improve the effectiveness of our internal controls. To improve the effectiveness of the Company’s internal controls and address the material weaknesses referred to in the previous section under the caption “Management’s Report on Internal Control over Financial Reporting”, we hired an internal audit manager in the first quarter of fiscal 2006, a new controller in the fourth quarter of fiscal 2006, a finance manager at our subsidiary in France in the fourth quarter of fiscal 2006 and finance managers to oversee the finance functions of our Poland and South America operations in the first quarter of fiscal 2007. In addition, we have implemented an expanded policy related to revenue recognition and we are in the process of recruiting an additional accountant to the Corporate staff to assist in the consolidation and review process. With the staff additions, we will further revise our financial review procedures. Other than as described above, there has been no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected or is likely to materially affect our internal control over financial reporting.

50

Inherent Limitation on the Effectiveness of Internal Controls

     The effectiveness of any system of internal control over financial reporting, including Stratex’s, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct, including fraud, completely. Accordingly, any system of internal control over financial reporting, including Stratex’s, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

51

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Stratex Networks, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Stratex Networks, Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of March 31, 2006, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The material weakness described in the following paragraph has been identified and included in management’s assessment:

The Company’s controls over the review of the financial statements of the foreign operations and the period-end financial closing and reporting process for the Company’s consolidated operations are inadequate and constitute a material weakness in the design of internal control over financial reporting. Specifically, the Company lacks sufficient resources with the appropriate level of technical accounting expertise within the accounting function and therefore was unable to accurately perform certain of the designed controls over the March 31, 2006 financial closing and reporting process, evidenced by a significant number of adjustments which were necessary to present the financial statements for the year ended March 31, 2006 in accordance with generally accepted accounting principles. Based on the misstatements identified and the significance of the financial closing and reporting process to the preparation of reliable financial statements, there is a more than remote likelihood that a material misstatement of the interim and annual financial statements would not have been prevented or detected.

52

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2006 of the Company and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2006 of the Company and our report dated June 14, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ DELOITTE & TOUCHE LLP
San Jose, California
June 14, 2006

53

Quarterly Financial Data and Stock Information (Unaudited)

The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for fiscal 2006 and 2005 are as follows (in thousands, except per share data):

	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Fiscal 2006
Net sales	$	54,872		$	56,554		$	55,514		$	63,951
Gross profit (1)		12,601			15,168			16,206			19,614
Income (loss) from operations		(3,094	)		(717	)		2,089			4,044
Net income (loss)		(4,166	)		(2,261	)		813			3,317
Basic and diluted net earnings loss per common share (2)		(0.04	)		(0.02	)		0.01			0.03
Market price range common stock (3)
High	$	2.10		$	2.74		$	3.84		$	6.27
Low		1.24			1.72			2.18			3.25
Quarter-end Close		1.72			2.60			3.58			6.15
Fiscal 2005
Net sales	$	46,041		$	43,615		$	49,519		$	41,127
Gross profit (1)		6,926			8,428			7,504			3,465
Loss from operations		(7,463	)		(6,135	)		(17,292	)		(12,831	)
Net loss		(7,984	)		(6,778	)		(17,934	)		(13,250	)
Basic and diluted net loss per common share (2)		(0.09	)		(0.08	)		(0.19	)		(0.14	)
Market price range common stock (3)
High	$	5.19		$	3.38		$	2.40		$	2.45
Low		2.40			1.98			1.65			1.45
Quarter-end Close		2.95			2.24			2.26			1.84

(1)	Gross profit is calculated by subtracting cost of sales from net sales
(2)	Earnings (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss per share will not necessarily equal the total for the year.
(3)	The Company’s common stock is traded on the Nasdaq National Market under the symbol STXN.

The Company has not paid cash dividends on its Common Stock and does not intend to pay cash dividends in the foreseeable future in order to retain earnings for use in its business. At March 31, 2006, there were approximately 396 stockholders of record.

54

Corporate Directory

Officers and Senior Executives who report to the CEO and other Officers.

Charles D. Kissner
Chairman of the Board of Directors

Thomas H. Waechter
President and Chief Executive Officer

Paul A. Kennard
Senior Vice President, Products and CTO

Carl A. Thomsen
Senior Vice President
Chief Financial Officer and Secretary

John C. Brandt
Vice President, Business Development

Larry M. Brittain
Vice President, Worldwide Sales and Service

Shaun McFall
Vice President, Marketing

John P. O’Neil
Vice President, Human Resources

Louis Salinas
Vice President, Engineering

Heinz Stumpe
Vice President, Operations

Carol A. Goudey
Corporate Treasurer and Assistant Secretary

Robert W. Kamenski
Corporate Controller

Juan B. Otero
Corporate General Counsel and Assistant Secretary

55

Directors

Charles D. Kissner
Chairman of Board of Directors

Richard C. Alberding
Executive Vice President (Retired)
Hewlett-Packard Company

Clifford H. Higgerson
Venture Partner
Walden International

Dr. James D. Meindl, Ph.D.
Director
Microelectronics Research Center
and
Joseph M. Pettit Chair
Professor of Microelectronics
Georgia Institute of Technology

V. Frank Mendicino
Managing Director
Access Venture Partners

William A. Hasler
Vice-Chairman and Director
Aphton Corporation

Edward F. Thompson
Chief Financial Officer (Retired)
Amdahl Corporation

Thomas H. Waechter
President and Chief Executive Officer

Independent Registered Public Accounting Firm

Deloitte & Touche LLP
San Jose, California

Outside Legal Counsel

Bingham McCutchen LLP
San Francisco, California

56

Registrar and Transfer Agent

Mellon Investor Services LLC
San Francisco, California

Principal Subsidiaries

Stratex Networks (UK) Limited
Lanarkshire, Scotland

Stratex Networks Mexico, S.A. de C.V.
Mexico D.F., Mexico

Stratex Networks (India) Private Limited
New Delhi, India

Stratex Networks (Philippines), Inc.
Makati City, Philippines

Stratex Networks (NZ) Limited
Wellington, New Zealand

DMC Stratex Networks (Africa) (Proprietary) Limited
Midrand, South Africa

Stratex Networks (S) Pte. Ltd.
Singapore

Stratex Networks (Thailand) Ltd.
Bangkok, Thailand

Stratex Networks Polska Spolka z.o.o
Warsaw, Poland

Corporate Headquarters

Stratex Networks, Inc.
120 Rose Orchard Way
San Jose, California 95134 USA

Sales and Service Offices

North America:
San Jose, California

Satellite Beach, Florida
Geneva, Illinois

57

Central and South America:
Mexico City, Mexico

Europe:
Nuneaton, England
Lanarkshire, Scotland
Warsaw, Poland
Aix en Provence, France
Lisbon, Portugal
Zagreb, Croatia

Middle East:
Dubai, United Arab Emirates

Africa:
Midrand, South Africa
Lagos, Nigeria

Asia/Pacific:
Singapore
Wellington, New Zealand
Beijing, China
Clark Special Economic Zone, Philippines
Metro Manila, Philippines
New Delhi, India
Bangkok, Thailand
Selangor, Malaysia

SEC Form 10-K

A copy of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission is available without charge by writing to:
Stratex Networks, Inc.
Attn: Investor Relations
120 Rose Orchard Way
San Jose, California 95134

Cautionary Statements

This Annual Report contains forward-looking statements concerning the Company’s goals, strategies, and expectations for business and financial results, which are based on current expectations, estimates, and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. For a discussion of these risks and uncertainties, please refer to the section, “Critical accounting policies and estimates” beginning on page 3,” “Factors That May Affect Future Financial Results,” beginning on page 19 in this Annual Report and Item 1A. “Risk Factors” of the Company’s Form 10-K filed June 14, 2006, with the Securities and Exchange Commission.

58

EX-21.1

Exhibit 21.1

List of Subsidiaries

	Jurisdiction of
Name/Location	Incorporation
Stratex Networks (UK) Limited, Lanarkshire, Scotland	State of Delaware, USA
Stratex Networks Mexico, S.A. de C.V., Mexico D.F., Mexico	Mexico City, Mexico
Stratex Networks (Philippines), Inc., Makati City, Philippines	Metro Manila, Philippines
Stratex Networks (India) Private Limited, New Delhi, India	New Delhi, India
Stratex Networks (NZ) Limited, Wellington, New Zealand	Wellington, New Zealand
DMC Stratex Networks (Africa)(Proprietary) Limited, Midrand, South Africa	Republic of South Africa
Stratex Networks (S) Pte. Ltd., Singapore	Republic of Singapore
Stratex Networks Polska Spolka z.o.o., Warsaw, Poland	Warsaw, Poland
Stratex Networks (Thailand) Ltd., Bangkok, Thailand	Bangkok, Thailand

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

     We consent to the incorporation by reference in Registration Statements Nos. 333-80281, 333-85135, 333-88586, 333-98735, 333-101331, 333-110664, 333-122267 and 333-128761 of Stratex Networks, Inc., (the Company) on Form S-8 and Registration Statements Nos.333-73021 and 333-50820 of Stratex Networks on Form S-3 of our reports dated June 14, 2006, related to the consolidated financial statements and financial statement schedule of the Company and management’s report on the effectiveness of internal control over financial reporting (which report expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness) appearing in this Annual Report on Form 10-K of Stratex Networks, Inc. for the year ended March 31, 2006.

/s/ DELOITTE & TOUCHE LLP
San Jose, California

June 14, 2006

EX-31.1

EXHIBIT 31.1

STRATEX NETWORKS, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Thomas H. Waechter, certify that:

1.	I have reviewed this annual report on Form 10-K of Stratex Networks, Inc. (the “registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 14, 2006	By	/s/ Thomas H. Waechter Thomas H. Waechter
		President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

STRATEX NETWORKS, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Carl A. Thomsen, certify that:

1.	I have reviewed this annual report on Form 10-K of Stratex Networks, Inc. (the “registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 14, 2006	By	/s/ Carl A. Thomsen Carl A. Thomsen
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

STRATEX NETWORKS, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the periodic report of Stratex Networks, Inc. (the “Company”) on Form 10-K for the period ended March 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Thomas H. Waechter, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: June 14, 2006	/s/ Thomas H. Waechter
	Thomas H. Waechter
	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

STRATEX NETWORKS, INC.

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the periodic report of Stratex Networks, Inc. (the “Company”) on Form 10-K for the period ended March 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Carl A. Thomsen, Chief Financial and Accounting Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: June 14, 2006	/s/ Carl A. Thomsen
	Carl A. Thomsen
	Chief Financial Officer