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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the year ended March 31, 2004

or

For the transition period from              to              .

Commission file number 0-15895

STRATEX NETWORKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

Indicate by 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.    x

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

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 $3.85 per share on the Nasdaq National Market as of September 30, 2003 was approximately $169,741,618.

As of May 14, 2004, there were 84,171,435 shares of Common Stock, par value $0.01 per share, outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the registrant’s Annual Report to Stockholders for the year ended March 31, 2004 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, 2004 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 16 or 17 (pending Board decision), 2004 are incorporated by reference into Part II, Item 5 and Part III of this Annual Report on Form 10-K.

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STRATEX NETWORKS, INC.

2004 FORM 10-K ANNUAL REPORT

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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 “Factors That May Affect Future Financial Results” 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. 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 450 Fifth St., 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 2XOC-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. For example, in 2001, we introduced the Vantex chip set, which integrates high-order Quadrature Amplitude Modulation (QAM), forward error correction and adaptive equalization, all essential components in high-performance wireless radios, into one common chipset. In 2002, we introduced the Altium MX platform, which utilizes the Vantex chipset and provides a high capacity wireless solution, allowing the deployment of voice and advanced data services for mobile backhaul, fixed wireless access and private network applications. Our newest product platform, Eclipse, introduced in July 2003, is one of the first wireless 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 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.

In fiscal 2004, we acquired net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. (“Tellumat”) located in Cape Town, South Africa. With the acquisition of these net assets, we have obtained a license-exempt telecommunications product line. We believe that this product line compliments our existing licensed product lines and will expand our market presence in the license exempt market. Prior to the acquisition of Plessey Broadband Wireless, we private labeled this product from them.

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Our 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 270,000 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, wireline 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.

In the past three years, the wireless telecommunications industry has experienced a significant downturn that has caused wireless carriers to make material cuts in the capital expenditures that they allocate to network maintenance and expansion. Despite cost rationalization by service providers, worldwide demand for high-performance, high-capacity and high-speed wireless transmission products continues to grow at a higher rate than the wireless infrastructure market. 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:

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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.

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.

Our Solution

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

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Our Strategy

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

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businesses through marketing and sales of our existing products and new products including Eclipse and the license-exempt product line recently acquired in connection with our acquisition of Plessey Broadband Wireless, a division of Tellumat, Pty Ltd., a South African company.

Financial information by operating segment and geographic area

For financial information by operating segment and product category, see note 16 “Operating Segment and Geographic Information” to the Consolidated Financial Statements of our 2004 Annual Report to Stockholders.

Existing Products

Our principal product families include the AltiumMX, XP4^™, DART^™, DXR® 700, DXR® 200, DXR® 100, ProVision®, VeloxLE^™ and our recently introduced wireless platform consisting of an Intelligent Node Unit called Eclipse^™ (“Eclipse”). An Intelligent Node Unit is a network node able to support multiple radio paths.

High Capacity Radio

AltiumMX. The AltiumMX digital microwave radio is the latest generation of the Altium product, which originally 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). AltiumMX incorporates the Vantex chipset, which we introduced in February 2001, utilizing features such as high-order QAM modulation (up to 256 QAM), forward error correction, and adaptive equalization. These are all essential components in high-performance wireless radio products. With products enabled by the Vantex chipset, we can achieve required capacities in a single chipset with significant cost savings.

Medium-to-Low Capacity Radios

XP4 Plus. The XP4 Plus series of digital microwave radios provides low-to-medium capacity microwave radio systems for cellular 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.

DART. The DART microwave radio offers a low cost single E1 or DS-1 data stream transmission and is designed for a smaller cell site in a wireless network, typically referred to as microcell/ picocell, and last-mile access requirements. DART radio’s compact, all-outdoor design connects directly to base station equipment via a single twisted-pair cable, making it easy to install and a viable, cost effective alternative to leased line facilities. The DART radio can also be used in the build out of wireless Internet access networks. Features of the DART microwave radio include its compact, integrated outdoor unit, low power consumption, programmability from laptop computers, and SNMP compatibility. Available frequencies range from 15 GHz to 38 GHz.

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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.

DXR 200. The DXR 200 product line provides an integrated, modular, linking solution for a wide variety of communications systems in markets with low to medium capacity transmission requirements. The DXR 200’s integrated modular design allows it to support a variety of configurations, which can incorporate multiple features in the unit to accommodate the differing communications needs of our customers, overcome difficult radio frequency environments, accommodate multiple data speeds and support multiple communication protocols. The DXR 200 can operate in frequency bands from 300 MHz to 2.7 GHz.

DXR 100. The DXR 100 product line is designed to address medium and long distances, trunking applications and capacities higher than those addressed by the DXR 200. The DXR 100 microwave radio supports these higher capacity environments using spectrum efficient transmission techniques, including Quadrature Phase Shift Keying (QPSK) or QAM modulation and low error rate technologies, including forward error correction and adaptive equalization. It provides low to medium capacity links for cellular applications, basic telephony transmission and customer access applications, particularly in urban areas. The DXR 100 microwave radio supports a variety of data rates with high spectrum efficiencies and maintains signal reception in harsh or difficult radio frequency environments.

Network Monitoring and Control System

ProVision. The ProVision element manager is a centralized network monitoring and control system for all of our products. Based on a UNIX^® system 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 all our management-enabled radios, including the Altium MX, XP4 Plus, DART and DXR radio families, as well as our prior radio products and our new Eclipse product platform.

License Exempt Radio Product

VeloxLE. VeloxLE is a license-exempt radio platform that has been added to our product portfolio to provide the flexibility of license-exempt products. 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 interface. Prior to October 2003, we private labeled this product from Plessey Broadband Wireless, a division of Tellumat, Pty Ltd., a South African company. In October 2003, we acquired the assets of the Plessey Broadband Wireless division and the product line.

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New Product

Eclipse

Eclipse, introduced in July 2003, and with first commercial shipment and related revenue in January 2004, is our newest product and combines the capabilities of the Altium, XP4 Plus and DXR 700 products into one product platform. Eclipse has the following benefits:

Customers

We market our products primarily to mobile wireless carriers around the world. Our solutions also address the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. We also sell our products to base station suppliers, who provide and install integrated systems to service providers, and to distributors, including value-added resellers (VARs) and agents.

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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 2004 was MTN Nigeria Communications Ltd. (19%). Our top two customers in net sales for fiscal 2003 were MTN Nigeria Communications Ltd. (11%) and Motorola (Thailand) Ltd. (10%). Our top customer in net sales for fiscal 2002 was Beijing Telecom Equipment Factory (15%). No other customer, other than the ones mentioned above, accounted for more than 10% of net sales for each of the three fiscal years ending March 31, 2004. At March 31, 2004, three of our customers accounted for approximately 12%, 12% and 11% of our $59.1 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, Colombia, Argentina, Brazil, the United Kingdom, Portugal, France, Poland, Germany, Greece, South Africa, the United Arab Emirates, India, Singapore, the People’s Republic of China, Malaysia, Thailand, the Philippines, New Zealand, Nigeria and Australia. 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.

We have informal, and in some cases formal, relationships with 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, 2004, we employed approximately 254 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 service and support 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. Our customer service and support personnel 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. We provide warranty and post-warranty services from our manufacturing locations in the United States, New Zealand and South Africa and our service centers in Scotland and the Philippines.

Research and Development

We are, and historically have been, an industry innovator. For example, in 1999, we introduced Altium providing both SDH and SONET broadband transport capability. In 2001, we introduced the Vantex chip set integrating high-order QAM. In 2002, we introduced the Altium MX platform, which utilizes the Vantex chipset. Our newest product platform, Eclipse, introduced in July 2003, 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.

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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 2004, we invested $17.2 million or 10.9% of net sales on research and development, compared to $14.4 million or 7.3% of net sales in fiscal 2003 and $18.5 million or 8.1% of net sales in fiscal 2002. We expect our research and development spending to be slightly higher in fiscal 2005 due to the acquisition of Plessey Broadband Wireless in the third quarter of fiscal 2004. As of March 31, 2004, we employed a total of approximately 149 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 Microelectronics Technology Inc. (MTI) in Taiwan and to GPC Electronics in Australia. Pursuant to our arrangement with MTI, MTI has assumed assembly, integration and testing of our Altium product family, as well as assembly and testing of the Outdoor Unit portion of our XP4 Plus, DART and the new Eclipse product lines. GPC Electronics is the primary supplier for the production of the Indoor Unit portion of our XP4 and the new Eclipse product as well as the assembly, integration and testing of our DXR product line. We have retained product design and research and development functions for these products.

In addition to the outsourcing of our manufacturing, we have manufacturing facilities at San Jose, California, Wellington, New Zealand and our new facility at Cape Town, South Africa. Our manufacturing operations at San Jose consist primarily of software configuration, system testing and quality management of our products. Our facility in Wellington, New Zealand is primarily responsible for the system testing and software configuration of our DXR product family of products. It is also our key software research and development center and has played a major role in the development of the new Eclipse product. Our new facility in Cape Town, South Africa manufactures our Velox family of license exempt products. Our manufacturing operations have been certified to International Standards Organization (ISO) 9001, a recognized international quality standard. With the exception of our facility in Cape Town, South Africa, we have also been certified to the TL9000 standard, a Telecommunication Industry specific quality system standard. As of March 31, 2004, we employed 108 people in manufacturing and manufacturing support functions.

Backlog

Our backlog at March 31, 2004 was $59.1 million, compared with $50.1 million at March 31, 2003. 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.

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Competition

The wireless interconnection and access business is a specialized segment of the wireless telecommunications industry and is extremely competitive. We expect that competition will increase. 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, Nera Telecommunications, 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 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 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 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 seven issued patents, including one foreign patent, and six pending patents, four of 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.

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Raw Materials and Supplies

Because we outsource majority of our manufacturing, we are dependent upon subcontractors to meet performance and quality specifications and delivery schedules. In some cases, we help our sub-contractors procure certain components in order to meet our delivery schedules. 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, 2004, we employed 617 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.

Factors That May Affect Future Financial Results

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:

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

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

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

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

Our average sales prices are declining.

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

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

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

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

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

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

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

We are highly dependent on sales to customers outside the United States. During fiscal 2004 net sales to international customers accounted for 98% of the net sales. During fiscal 2002 and 2003, sales to international customers accounted for 92% and 95% of our net sales, respectively. In fiscal 2004, 2003 and 2002, sales to the Middle East/Africa region accounted for approximately 33%, 24% and 16% 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:

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

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

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

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

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

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

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

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

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

Our success depends on new product introductions and acceptance.

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

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

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

Our business requires extensive credit risk management that may not be adequate to protect against customer nonpayment. Risks of nonpayment and nonperformance by customers are a major consideration in our business. Our accounts receivable balance is also concentrated among a few customers, increasing our credit risk. The following table summarizes the number of our significant customers, each of whom accounted for more than 10% of accounts receivable at the end of the year 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 years indicated.