AVIAT NETWORKS, INC. - Quarter Report: 2009 January (Form 10-Q)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
January 2, 2009

Note A — Basis of Presentation and Nature of Operations

     The accompanying condensed consolidated financial statements include the accounts of Harris Stratex Networks, Inc. and its wholly-owned and majority-owned subsidiaries (“we,” “us,” and “our”) and have been prepared by us, without an audit, in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and changes in cash flows in conformity with U.S. generally accepted accounting principles. In the opinion of our management, such financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for such periods.

     The results for the quarter ended January 2, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet as of June 27, 2008 has been derived from our audited financial statements but does not include all the information and footnotes required by generally accepted accounting principles in the United States for annual financial statements. We provide complete financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2008 (“Fiscal 2008 Form 10-K”) and the Quarterly Report on Form 10-Q/A for the quarter ended December 28, 2007, both of which were filed with the SEC on September 25, 2008.

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. Actual results could differ from those results and estimates.

     As of January 2, 2009, Harris Corporation (“Harris”) owned 100% of our Class B common stock or approximately 56% of the total shares of our common stock.

     Nature of Operations — We design, manufacture and sell a broad range of microwave radios, scalable wireless network solutions and vertical market solutions for use in worldwide wireless and wireline communications networks. Applications include cellular/mobile infrastructure connectivity; WiMAX networks and energy and security solutions; secure data networks; public safety transport for state, local and federal government users; and right-of-way connectivity for utilities, pipelines, railroads and industrial companies. In general, wireless networks are constructed using microwave radios and other equipment and network management solutions to connect cell sites, fixed-access facilities, switching systems, land mobile radio systems and other similar systems.

Note B — Accounting Changes and Recent Accounting Pronouncements

     Initial Application of Standards, Interpretations and Amendments to Standards and Interpretations

Fair Value Measurements

     In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Statement 157 applies under other accounting pronouncements that require fair value measurement in which the FASB concluded that fair value was the relevant measurement, but does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which defers the effective date of Statement 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, which for us is our fiscal 2010. We adopted Statement 157 in the first quarter of fiscal 2009 and there was no impact to our financial position, results of operations or cash flows. In accordance with FSP FAS 157-2, we elected to defer until fiscal 2010 the adoption of Statement 157 for nonfinancial assets (including items such as goodwill and other intangible assets) and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not currently anticipate that the adoption of Statement 157 for nonfinancial assets and nonfinancial liabilities will materially impact our financial position, results of operations or cash flows. See Note D — Fair Value Measurements of Financial Assets and Financial Liabilities in these Notes to Condensed Consolidated Financial Statements (Unaudited) for disclosures required by Statement 157.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“Statement 159”). Statement 159 allows companies to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, all unrealized gains or losses in fair value for that instrument shall be reported in earnings at each subsequent reporting date. We adopted Statement 159 in the first quarter of fiscal 2009 but have not elected the fair value option for any eligible financial instruments.

      Standards, Interpretations and Amendments Issued, but not yet Adopted

Accounting for Business Combinations

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“Statement 141R”). Statement 141R requires that, upon a business combination, the acquired assets, assumed liabilities, contractual contingencies and contingent liabilities be recognized and measured at their fair value at the acquisition date. Statement 141R also requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred. In addition, Statement 141R requires that acquired in-process research and development be measured at fair value and capitalized as an indefinite-lived intangible asset, and it is therefore not subject to amortization until the project is completed or abandoned. Statement 141R also requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties that are recognized after the measurement period be recognized in income tax expense. Statement 141R is to be applied prospectively and is effective for fiscal years beginning on or after December 15, 2008, which for us is our fiscal 2010. Thus, while adoption is not expected to materially impact our financial position, results of operations or cash flows directly when it becomes effective on July 4, 2009 (the beginning of our fiscal 2010), it is expected to have a significant effect on the accounting for any acquisitions we make on, or subsequent to that date.

Accounting for Noncontrolling Interests in Consolidated Financial Statements

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“Statement 160”). Statement 160 requires that noncontrolling interests (previously referred to as minority interests) be clearly identified and presented as a component of equity, separate from the parent’s equity. Statement 160 also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for as equity transactions; and that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in that subsidiary and the gain or loss on the deconsolidation of that subsidiary be measured at fair value. Statement 160 is to be applied prospectively, except for the presentation and disclosure requirements (which are to be applied retrospectively for all periods presented) and is effective for fiscal years beginning after December 15, 2008, which for us is our fiscal 2010. We do not currently anticipate the implementation of Statement 160 will materially impact our financial position, results of operations or cash flows.

Disclosures about Derivative Instruments and Hedging Activities

     In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“Statement 161”). Statement 161 applies to all derivative instruments, including bifurcated derivative instruments (and to nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 37 and 42 of FASB Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“Statement 133”) and related hedged items accounted for under Statement 133. Statement 161 amends and expands the disclosure requirements of Statement 133 to provide greater transparency as to (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, Statement 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the volume of derivative activity and fair value amounts of, and gains and losses on, derivative instruments including location of such amounts in the consolidated financial statements, and disclosures about credit-risk-related contingent features in derivative agreements. Statement 161 is effective for fiscal years and interim periods that begin after November 15, 2008, which for us is the third quarter of our fiscal 2009 (which began January 3, 2009). We do not currently anticipate the implementation of Statement 161 will materially impact our financial position, results of operations or cash flows.

Earnings per Share

     In June 2008, the FASB issued FSP No. Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain rights to receive nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are participating securities and, accordingly, should be included in the two-class method of calculating earnings per share (“EPS”) under FASB Statement of Financial Accounting Standards No. 128, “Earnings per Share.” FSP EITF 03-6-1 also includes guidance on allocating earnings pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, which for us is our fiscal 2010. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) shall be adjusted retrospectively. We do not currently anticipate that the implementation of FSP EITF 03-6-1 will materially impact our financial position, results of operations or cash flows.

Useful Life of Intangible Assets

     In April 2008, the FASB issued FSP No. FAS 142-3, “Determining the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets accounted for pursuant to FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“Statement 142”). FSP FAS 142-3 amends Statement 142 to require an entity to consider its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions. In the absence of such experience, FSP FAS 142-3 requires an entity to consider assumptions that market participants would use (consistent with the highest and best use of the asset by market participants), adjusted for entity-specific factors. FSP FAS 142-3 also requires incremental disclosures for renewable intangible assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008, which for us is our fiscal 2010. FSP FAS 142-3 is to be applied prospectively to intangible assets acquired after the effective date, and the incremental disclosure requirements for renewable intangible assets are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.

Note C — Goodwill and Trade Name Impairments

     We test our goodwill and other indefinite-lived intangible assets in accordance with Statement 142 as part of our fiscal year-end financial close process and when events or circumstances indicate there may be an impairment. The majority of our goodwill and the trade name “Stratex” were recorded in connection with the acquisition of Stratex in January 2007 and were included in the International Microwave segment of our business. In January 2009, we determined that based on the current global economic environment and the decline of our market capitalization, it was likely that an indicator of goodwill impairment existed as of the end of the second quarter of fiscal 2009. As a result, we performed an interim review for impairment as of the end of the second quarter of fiscal 2009 of our goodwill and other indefinite-lived intangible assets (consisting solely of the trade name “Stratex”).

     To test for potential impairment of our goodwill, we determined the fair value of each of our reporting segments based on projected discounted cash flows and market-based multiples applied to sales and earnings. The results indicated an impairment to goodwill, because the current carrying value of the North America Microwave and International Microwave segments exceeded their fair value. We then allocated these fair values to the respective underlying assets and liabilities to determine the implied fair value of goodwill, resulting in a $279.0 million charge to write down all of our goodwill. We determined the fair value of the trade name “Stratex” by performing a projected discounted cash flow analysis based on the relief-from-royalty approach, resulting in a $22.0 million charge to write down a majority of the trade name “Stratex.” The majority of the goodwill and the trade name “Stratex” were recorded in connection with the acquisition of Stratex Networks, Inc. in January 2007. We will not be required to make any current or future cash expenditures as a result of these impairments, and these impairments do not impact our financial covenant compliance under our credit arrangements or our ongoing financial performance.

     For reasons similar to those stated above, we also conducted a review of our long-lived assets, including amortizable intangible assets, in accordance with FASB Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” This review did not indicate that an impairment existed as of the end of the second quarter of fiscal 2009.

     The following table summarizes the goodwill and trade name impairment charges by reporting unit:

		Quarter Ended								Two Quarters Ended
		January 2, 2009								January 2, 2009
						Trade								Trade
(in millions)		Goodwill				Name				Goodwill				Name
North America Microwave		$	31.8			$	0.7			$	31.8			$	0.7
International Microwave			247.2				21.3				247.2				21.3
Network Operations			—				—				—				—
Total		$	279.0			$	22.0			$	279.0			$	22.0

     A summary of changes in goodwill during the two quarters ended January 2, 2009, by reporting unit is as follows:

		June 27,																January 2,
		2008				Acquisitions				Adjustments				Impairments				2009
		(In millions)
North America Microwave		$	36.2			$	—			$	(4.4	)		$	(31.8	)		$	—
International Microwave			248.0				—				(0.8	)			(247.2	)			—
Total		$	284.2			$	—			$	(5.2	)		$	(279.0	)		$	—

     Adjustments primarily relate to the effect of foreign currency translation and changes in the fair value of net assets subject to purchase accounting adjustments related to accounting for income taxes.

     A summary of changes in the Stratex trade name during the two quarters ended January 2, 2009, by reporting unit is as follows:

		June 27,																January 2,
		2008				Acquisitions				Adjustments				Impairments				2009
		(In millions)
North America Microwave		$	1.0			$	—			$	—			$	(0.7	)		$	0.3
International Microwave			32.0				—				—				(21.3	)			10.7
Total		$	33.0			$	—			$	—			$	(22.0	)		$	11.0

Note D — Fair Value Measurements of Financial Assets and Financial Liabilities

     We adopted Statement 157 in the first quarter of fiscal 2009 and there was no impact to our financial position, results of operations or cash flows. In accordance with FSP FAS 157-2, we elected to defer until fiscal 2010 the adoption of Statement 157 for all nonfinancial assets (including items such as goodwill and other intangible assets) and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Statement 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants as of the measurement date. Statement 157 requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value and establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access as of the measurement date.
	•		Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from—or corroborated by—observable market data by correlation or other means.
	•		Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

     The following table represents the fair value hierarchy of our financial assets and liabilities measured at fair value on a recurring basis (at least annually) as of January 2, 2009:

		Level 1				Level 2				Level 3				Total
						(In millions)
Financial Assets:
Short-term investments		$	1.6			$	—			$	—			$	1.6
Foreign exchange forward contracts			—				0.1				—				0.1
Financial Liabilities:
Foreign exchange forward contracts			—				0.4				—				0.4
Warrants			—				—				0.3				0.3

     The following table sets forth our financial instruments carried at fair value as of January 2, 2009 and June 27, 2008:

		January 2, 2009				June 27, 2008
		(In millions)
Financial Assets:
Short-term investments		$	1.6			$	3.1
Foreign exchange forward contracts			0.1				0.1
Total financial assets		$	1.7			$	3.2
Financial Liabilities:
Foreign exchange forward contracts		$	0.4			$	0.2
Warrants			0.3				0.6
Total financial liabilities		$	0.7			$	0.8

     Short-term investments and foreign exchange forward contracts are reported at fair value with the related unrealized holding gains and losses reported as a component of accumulated other comprehensive income in shareholders’ equity. Realized gains and losses are recorded in selling and administrative expenses.

     As of June 27, 2008, we had warrants to purchase shares of our Class A common stock. Our liability for warrants is classified as a Level 3 financial liability under Statement 157. As of January 2, 2009, warrants to purchase 520,445 shares of our Class A common stock were outstanding. These warrants have an exercise price of $11.80 per common share and will expire on September 24, 2009. The per share fair value of each warrant was $0.55 and $1.15 as of January 2, 2009 and June 27, 2008, determined based on the Black-Scholes-Merton model with the assumptions listed in the table below.

		January 2, 2009				June 27, 2008
Dividend yield			0.0	%			0.0	%
Expected volatility			94.0	%			58.9	%
Risk-free interest rate			0.40	%			2.31	%
Expected holding period		0.75 year				0.67 year

     As a result of recording these outstanding warrants at fair value as of January 2, 2009, we recorded the change in fair value during the two quarters ended January 2, 2009 as a $0.3 million reduction to selling and administrative expenses on our Condensed Consolidated Statements of Operations (none during the second quarter of fiscal 2009). During the quarter and two quarters ended January 2, 2009, no warrants were exercised.

     The following table sets a summary of changes in the fair value of our Level 3 financial liabilities (warrants) during the two quarters ended January 2, 2009:

		(In millions)
Balance as of June 27, 2008		$	0.6
Transfers during the period			—
Repurchases during the period			—
Realized gains (losses) during the period			—
Unrealized (gain) during the period			(0.3	)
Balance as of January 2, 2009		$	0.3

     Short-term investments as of January 2, 2009 and June 27, 2008 are as follows:

		January 2, 2009
						Gross				Gross
						Unrealized				Unrealized				Market
		Cost				Gain				Loss				Value
		(In millions)
Certificates of deposit		$	—			$	—			$	—			$	—
Commercial paper			0.6				—				—				0.6
Corporate notes			1.0				—				—				1.0
Total short-term investments		$	1.6			$	—			$	—			$	1.6

		June 27, 2008
						Gross				Gross
						Unrealized				Unrealized				Market
		Cost				Gain				Loss				Value
						(In millions)
Certificates of deposit		$	0.6			$	—			$	—			$	0.6
Commercial paper			1.4				—				—				1.4
Corporate notes			1.1				—				—				1.1
Total short-term investments		$	3.1			$	—			$	—			$	3.1

     As of January 2, 2009, all of our short-term investments have maturity dates of less than one year, with a weighted average maturity of 91 days. Realized gains and losses from the sale of short-term investments during the second quarter and first two quarters of fiscal years 2009 and 2008 were not significant.

Note E — Accumulated Other Comprehensive Income (Loss) and Comprehensive Loss

     The changes in components of our accumulated other comprehensive income (loss) during the two quarters ended January 2, 2009 and December 28, 2007 were as follows:

														Total
														Accumulated
		Foreign												Other
		Currency				Hedging				Short-Term				Comprehensive
		Translation				Derivatives				Investments				Income (Loss)
		(In millions)
Balance as of June 27, 2008		$	4.1			$	(0.3	)		$	—			$	3.8
Foreign currency translation loss			(15.9	)			—				—				(15.9	)
Net unrealized gain on hedging activities			—				0.8				—				0.8
Balance as of January 2, 2009		$	(11.8	)		$	0.5			$	—			$	(11.3	)
Balance as of June 29, 2007		$	—			$	—			$	—			$	—
Foreign currency translation gain			5.8				—				—				5.8
Net unrealized gain on hedging activities			—				—				—				—
Balance as of December 28, 2007		$	5.8			$	—			$	—			$	5.8

     Total comprehensive (loss) income for the quarter and two quarters ended January 2, 2009 and December 28, 2007 was comprised of the following:

		Quarter Ended								Two Quarters Ended
		January 2,				December 28,				January 2,				December 28,
		2009				2007				2009				2007
						(In millions)
Net loss		$	(315.4	)		$	(3.2	)		$	(309.8	)		$	(3.4	)
Other comprehensive (loss) income:
Foreign currency translation (loss) income			(11.7	)			3.1				(15.9	)			5.8
Net unrealized (loss) gain on hedging activities			(0.6	)			(0.3	)			0.8				—
Total comprehensive (loss) income		$	(327.7	)		$	(0.4	)		$	(324.9	)		$	2.4

Note F — Receivables

     Our receivables are summarized below:

		January 2, 2009				June 27, 2008
		(In millions)
Accounts receivable		$	193.2			$	205.5
Notes receivable due within one year — net			3.2				6.8
			196.4				212.3
Less allowances for collection losses			(15.9	)			(12.6	)
		$	180.5			$	199.7

Note G — Inventories

     Our inventories are summarized below:

		January 2, 2009				June 27, 2008
		(In millions)
Finished products		$	68.1			$	55.5
Work in process			11.2				14.4
Raw materials and supplies			63.6				59.2
			142.9				129.1
Inventory reserves			(32.2	)			(35.6	)
		$	110.7			$	93.5

Note H — Property, Plant and Equipment

     Our property, plant and equipment are summarized below:

		January 2, 2009				June 27, 2008
		(In millions)
Land		$	1.3			$	1.3
Buildings			28.9				29.1
Software developed for internal use			14.6				13.9
Machinery and equipment			121.0				121.6
			165.8				165.9
Less allowances for depreciation and amortization			(93.8	)			(90.3	)
		$	72.0			$	75.6

     Depreciation and amortization expense related to plant and equipment, including software amortization, was $5.2 million and $3.4 million during the quarters ended January 2, 2009 and December 28, 2007, and $9.8 million and $8.0 million in the two quarters ended January 2, 2009 and December 28, 2007.

Note I — Credit Facility and Debt

     Our debt consisted of the following as of January 2, 2009 and June 27, 2008:

		January 2, 2009				June 27, 2008
		(In millions)
Long-term borrowings		$	—			$	8.8
Short-term borrowings			10.0				—
Total			10.0				8.8
Less short-term borrowings and current portion of long-term debt			(10.0	)			(5.0	)
Long-term debt outstanding		$	—			$	3.8

     As of June 27, 2008, we had a credit facility with Silicon Valley Bank (the “Original Credit Facility”) which provided for short-term and long-term borrowings. The Original Credit Facility allowed for revolving credit borrowings of up to $50 million with available credit defined as $50 million less the outstanding balance of the long-term portion and any usage under the revolving credit portion. As of June 27, 2008, the outstanding balance of the long-term portion of our Original Credit Facility was $8.8 million and there were $8.6 million in outstanding standby letters of credit as of that date defined as usage under the revolving credit portion of the facility. As of January 2, 2009, $6.7 million of these standby letters of credit outstanding under the Original Credit Facility remain as an obligation to Silicon Valley Bank.

     On June 30, 2008 the Original Credit Facility was terminated and replaced by a new revolving credit facility with Silicon Valley Bank and Bank of America as of that date (the “New Facility”).The outstanding balance of the Original Credit Facility was repaid in full, including all accrued interest, on June 30, 2008 with the proceeds of a $10 million short-term borrowing under the New Facility.

     The New Facility provides for an initial committed amount of $70 million with an uncommitted option for an additional $50 million available with the same or additional banks. The initial term of the New Facility is three years and provides for (1) demand borrowings (with no stated maturity date) with an interest rate of the greater of Bank of America’s prime rate or the Federal Funds rate plus 0.5%, (2) fixed term Eurodollar loans for up to six months or more as agreed with the banks with an interest rate of LIBOR plus a spread of between 1.25% to 2.00% based on our current leverage ratio and (3) the issuance of standby or commercial letters of credit. The New Facility contains a minimum liquidity ratio covenant and a maximum leverage ratio covenant and is unsecured. As of January 2, 2009, we were in compliance with these financial covenants.

     The New Facility allows for borrowings of up to $70 million with available credit defined as $70 million less the outstanding balance of borrowings ($10.0 million as of January 2, 2009) and letters of credit ($7.6 million as of January 2, 2009). Available credit as of January 2, 2009 was $52.4 million. The interest rate on our short-term borrowings was 3.25% as of January 2, 2009.

Note J — Accrued Warranties

     Changes in our warranty liability, which is included as a component of “Other accrued items” on the Condensed Consolidated Balance Sheets, during the two quarters ended January 2, 2009 and December 28, 2007 are as follows:

		Two Quarters Ended
		January 2, 2009				December 28, 2007
		(In millions)
Balance as of the beginning of the fiscal year		$	6.9			$	6.7
Warranty provision for revenue recorded during the period			3.5				3.7
Settlements made during the period			(3.3	)			(3.9	)
Other adjustments to liability, including foreign currency translation during the period			—				0.1
Balance as of the end of the period		$	7.1			$	6.6

Note K — Restructuring Activities

     During the first quarter of fiscal 2009, we announced a new restructuring plan (the “Fiscal 2009 Plan”) to reduce our workforce in Canada, Brazil and the U.S. During the first two quarters of fiscal 2009, our restructuring charges totaled $4.4 million consisting of:

•		Severance, retention and related charges associated with reduction in force activities totaling $4.6 million (Fiscal 2009 Plan).
•		Impairment of fixed assets (non-cash charges) totaling $0.4 million and facility restoration costs of $0.3 million at our Canadian location (Fiscal 2009 Plan).
•		Adjustments to the restructuring liability under our 2007 restructuring plans (the “Fiscal 2007 Plans”) for changes in estimates related to sub-tenant activity at our U.S. ($0.3 million) and Canadian locations ($0.3 million).
•		Adjustments to the restructuring liability under our 2007 restructuring plans for changes in estimates to reduce the severance liability in Canada ($0.3 million).

     The information in the following table summarizes our restructuring activity during the two quarters ended January 2, 2009 and the remaining restructuring liability as of January 2, 2009.

		Severance				Facilities
		and				and
		Benefits				Other				Total
		(In millions)
Restructuring liability as of June 27, 2008		$	1.8			$	8.5			$	10.3
Provision in the two quarters (Fiscal 2009 Plan)			4.6				0.7				5.3
Reversal of accrual in the two quarters to statement of operations for changes in estimates (Fiscal 2007 Plans)			(0.3	)			(0.6	)			(0.9	)
Non-cash charges in the two quarters (Fiscal 2009 Plan)			—				(0.4	)			(0.4	)
Cash payments in the two quarters			(4.1	)			(1.9	)			(6.0	)
Restructuring liability as of January 2, 2009		$	2.0			$	6.3			$	8.3
Current portion of restructuring liability as of January 2, 2009		$	2.0			$	2.5				4.5
Long-term portion of restructuring liability as of January 2, 2009			—				3.8				3.8
Total restructuring liability as of January 2, 2009		$	2.0			$	6.3			$	8.3

Our Fiscal 2007 Plans were fully implemented during fiscal 2008.

     The following table summarizes the restructuring costs incurred through January 2, 2009 and costs expected to be incurred under our Fiscal 2009 Plan:

		Total Costs
		Incurred During				Cumulative
		The				Costs Incurred								Total
		Two Quarters Ended				through				Estimated				Restructuring
		January 2,				January 2,				Additional Costs				Costs Expected
		2009				2009				to be Incurred				to be Incurred
		(In millions)
North America Microwave:
Severance and benefits		$	3.8			$	3.8			$	1.0			$	4.8
Facilities and other			0.7				0.7				—				0.7
Total North America Microwave		$	4.5			$	4.5			$	1.0			$	5.5
International Microwave:
Severance and benefits		$	0.8			$	0.8			$	1.7			$	2.5
Facilities and other			—				—				0.3				0.3
Total International Microwave		$	0.8			$	0.8			$	2.0			$	2.8
Totals		$	5.3			$	5.3			$	3.0			$	8.3

Note L — Share-Based Compensation

     Compensation expense for share-based awards was $0.4 million and $1.9 million for the quarters ended January 2, 2009 and December 28, 2007 and $1.5 million and $4.3 million for the two quarters ended January 2, 2009 and December 28, 2007. Amounts were included in our consolidated statements of operations as follows:

		Quarter Ended								Two Quarters Ended
		January 2,				December 28,				January 2,				December 28,
		2009				2007				2009				2007
		(In millions)
Cost of product sales and services		$	0.1			$	0.5			$	0.3			$	0.7
Research and development expenses			0.1				0.2				0.3				0.7
Selling and administrative expenses			0.2				1.2				0.9				2.9
Total compensation expense		$	0.4			$	1.9			$	1.5			$	4.3

     During the quarter ended January 2, 2009, we determined that certain net income and cash flow targets would not be achieved for performance share awards made under our fiscal year 2007 Long-Term Incentive Plan. The 30-month performance period for these awards ends on July 3, 2009. We now estimate that 60% of these awards will not vest and will be forfeited as of July 3, 2009. Accordingly, we recorded a credit to compensation expense of $1.0 million during the quarter ended January 2, 2009 related to these awards. The final determination of the number of performance shares vesting in respect of an award will be determined by our Board of Directors, or a committee of our Board.

     During November 2008, we granted options to purchase 860,906 shares of our Class A Common Stock and 447,654 performance share awards to employees under our 2007 Stock Equity Plan. The fair value of each option grant was estimated on the date of grant using the Black-Scholes-Merton option-pricing model using the following weighted average assumptions: expected volatility of 53 percent; expected contractual term life of 4.4 years; and expected dividend yield of zero percent.

     We issued 688 shares upon the exercise of stock options during the two quarters ended January 2, 2009.

     We issued 8,120 and 85,365 shares upon the exercise of stock options during the quarter and two quarters ended December 28, 2007.

Note M — Business Segments

     We are organized into three operating segments around the markets we serve: North America Microwave, International Microwave and Network Operations. The North America Microwave segment designs, manufactures, sells and services microwave radio products, primarily for cellular network providers and private network users within North America (U.S. and Canada). The International Microwave segment designs, manufactures, sells and services microwave radio products, primarily for cellular network providers and private network users outside of North America. The Network Operations segment develops, designs, produces, sells and services network management software systems, primarily for cellular network providers and private network users.

     During the second quarter and first two quarters of fiscal 2009, Mobile Telephone Networks or (“MTN”) of Africa accounted for 11% and 12% of our total revenue and Middle East Telecommunications("METCO") accounted for 13% and 11% of our total revenue. During the second quarter and first two quarters of fiscal 2008, MTN accounted for 12% of our total revenue. As of January 2, 2009, MTN and METCO accounted for 5.5% and 13.8% of our accounts receivable.

     Revenue and loss before income taxes by segment are as follows:

		Quarter Ended								Two Quarters Ended
		January 2,				December 28,				January 2,				December 28,
		2009				2007				2009				2007
		(In millions)
Revenue
North America Microwave		$	64.8			$	63.8			$	126.3			$	120.4
International Microwave			121.2				110.8				252.1				220.0
Network Operations			4.9				6.5				8.3				13.0
Total Revenue		$	190.9			$	181.1			$	386.7			$	353.4
Loss Before Income Taxes
Segment Operating (Loss) Income:
North America Microwave (1)		$	(29.5	)		$	(1.3	)		$	(27.9	)		$	(1.6	)
International Microwave (2)			(262.3	)			(3.7	)			(256.4	)			(4.2	)
Network Operations			0.3				0.6				(0.4	)			1.4
Net interest expense			(0.4	)			(0.4	)			(0.7	)			(0.4	)
Loss before provision for income taxes		$	(291.9	)		$	(4.8	)		$	(285.4	)		$	(4.8	)

Note N — Income Taxes

The provision for income taxes for the second quarter and first two quarters of fiscal 2009 and 2008 is based on our estimated annual effective tax rate. Our provision for income taxes was $23.5 million and $24.4 million for the second quarter and first two quarters of fiscal 2009. The 2009 tax provision was primarily due to a $20.8 million increase in the valuation allowance for certain deferred tax assets in the second quarter of fiscal 2009. We have determined that it is more likely than not that we will not utilize our net operating loss carryforwards and have recorded a valuation allowance on the entire balance of our deferred tax assets. Additionally, we have offset the amount due to Harris with $9.8 million of deferred tax assets that were contributed to us by Harris as part of the combination agreement of merger with Stratex Networks, Inc. The variation between the provision (benefit) for income taxes and income tax expense (benefit) at the U.S. Federal statutory rate of 35% is also due to the increase in the valuation reserve and the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates.

     As of June 27, 2008, we had a liability for unrecognized tax benefits of $29.6 million for various federal, foreign, and state income tax matters. During the first two quarters of fiscal 2009, the liability for unrecognized tax benefits increased by $0.7 million. The total liability for unrecognized tax benefits as of January 2, 2009 was $30.3 million. If the unrecognized tax benefits associated with these positions are ultimately recognized, they would not be expected to have a material impact on our effective tax rate or financial position.

     We account for interest and penalties related to unrecognized tax benefits as part of our provision for federal, foreign, and state income taxes. We accrued an additional amount for such interest of less than $0.1 million during the second quarter and first two quarters of fiscal 2009 and fiscal year 2008. No penalties have been accrued.

     We expect that the amount of unrecognized tax benefit may change in the next year; however, it is not expected to have a significant impact on our results of operations, financial position or cash flows.

     We have a number of years with open tax audits which vary from jurisdiction to jurisdiction. Our major tax jurisdictions include the U.S., Nigeria, Singapore, New Zealand, Poland, South Africa, France and the U.K. The earliest years still open and subject to ongoing audits as for purposes of FIN 48 for these jurisdictions are as follows: (i) United States (Federal/State) — 2005/2004; (ii) Nigeria — 2004;
(iii) Singapore — 2002; (iv) New Zealand — 2004; (v) Poland — 2003; (vi) South Africa — 2002; (vii) France — 2005; and (viii) U.K. — 2007.

Note O — Related Party Transactions with Harris

     Pursuant to a Transition Services Agreement, Harris provides various services to us and charges are based primarily on actual usage. These services include database management, supply chain operating systems, eBusiness services, sales and service, financial systems, back office material resource planning support, HR systems, internal and information systems shared services support, network management and help desk support, and server administration and support. Harris charged us $1.8 million and $1.7 million for these services during the quarters ended January 2, 2009 and December 28, 2007, and $3.3 million and $3.4 million during the two quarters ended January 2, 2009 and December 28, 2007.

     We have sales to, and purchases from, other Harris entities from time to time. These purchases and sales are recorded at market price. Our sales to Harris entities were $1.0 million and $3.7 million for the quarters ended January 2, 2009 and December 28, 2007 and $1.9 million and $4.9 million for the two quarters ended January 2, 2009 and December 28, 2007. We also recognized costs associated with related party purchases from Harris of $0.6 million and $3.3 million for the quarters ended January 2, 2009 and December 28, 2007 and $1.9 million and $3.6 million for the two quarters ended January 2, 2009 and December 28, 2007.

     The unpaid amounts billed from Harris are included within “Due to Harris Corporation” on our Condensed Consolidated Balance Sheets. Additionally, we have other receivables and payables in the normal course of business with Harris. These amounts are netted within “Due from Harris Corporation” on our Condensed Consolidated Balance Sheets. Total receivables from Harris were $4.8 million and $4.0 million as of January 2, 2009 and June 27, 2008. Total payables to Harris were $3.1 million and $20.8 million as of January 2, 2009 and June 27, 2008.

     Prior to January 26, 2007, the date of our merger with Stratex Networks, Inc., we used certain assets in Canada owned by Harris that were not contributed to us as part of the merger. We continue to use these assets in our business and entered into a 5-year lease agreement to accommodate this use. This agreement is a capital lease under U.S. generally accepted accounting principles. As of January 2, 2009, our lease obligation to Harris was $2.1 million of which $1.1 million is a current liability and the related asset amount, net of accumulated amortization of $1.6 million, is included in property, plant and equipment. Quarterly lease payments are due to Harris based on the amount of 103% of Harris’ annual depreciation calculated in accordance with U.S. generally accepted accounting principles.

     During the first two quarters of fiscal 2008, we recognized an impairment charge of $1.3 million on a portion of these Canadian assets which is included in our restructuring charges. We also recognized an increase of $0.4 million to the lease obligation balance during the first two quarters of fiscal 2008 from a recapitalization under the lease terms, primarily because of the impairment charge and a rescheduling of the lease payments. During the first two quarters of fiscal 2009, we paid Harris $0.5 million under this capital lease obligation for the lease payments. During the first two quarters of fiscal 2008, we paid Harris $2.0 million under this capital lease obligation resulting from the $1.3 million impairment discussed above and for the lease payments. Our amortization expense on this capital lease was $0.2 million and $0.5 million for the quarters ended January 2, 2009 and December 28, 2007 and $0.6 million and $0.9 million for the two quarters ended January 2, 2009 and December 28, 2007.

Note P — Legal Proceedings

     On February 8, 2007, a court order was entered against Stratex do Brasil, a subsidiary of Harris Stratex Networks Operating Company, in Brazil, to enforce performance of an alleged agreement between the former Stratex Networks, Inc. entity and a supplier. We have not determined what, if any, liability this may result in, as the court did not award any damages. We have appealed the decision to enforce the alleged agreement, and do not expect this litigation to have a material adverse effect on our business, operating results or financial condition.

     We and certain of our current and former executive officers and directors were named in a federal securities class action complaint filed on September 15, 2008 in the United States District Court for the District of Delaware by plaintiff Norfolk County Retirement System on behalf of an alleged class of purchasers of our securities from January 29, 2007 to July 30, 2008, including shareholders of Stratex Networks, Inc. who exchanged shares of Stratex Networks, Inc. for our shares as part of the merger between Stratex Networks and the Microwave Communications Division of Harris Corporation. This action relates to the restatement of our prior financial statements as discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Similar complaints were filed in the United States District Court of Delaware on October 6 and October 30, 2008. Each complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as violations of Sections 11 and 15 of the Securities Act of 1933 and seeks, among other relief, determinations that the action is a proper class action, unspecified compensatory damages and reasonable attorneys’ fees and costs. We have entered into stipulations with plaintiffs’ counsel in these actions under which we will not have to respond to these claims until a lead plaintiff is selected by the Court and that lead plaintiff has filed a consolidated class action complaint. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

     From time to time, we may be involved in various legal claims and litigation that arise in the normal course of our operations. While the results of such claims and litigation cannot be predicted with certainty, we currently believe that we are not a party to any litigation the final outcome of which is likely to have a material adverse effect on our financial position, results of operations or cash flows. However, should we not prevail in any such litigation; it could have a materially adverse impact on our operating results, cash flows or financial position.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Harris Stratex Networks, Inc.

     We have reviewed the condensed consolidated balance sheet of Harris Stratex Networks, Inc. and subsidiaries as of January 2, 2009, the related condensed consolidated statements of operations for the quarter and two quarters ended January 2, 2009 and December 28, 2007, and the condensed consolidated statements of cash flows for the two quarters ended January 2, 2009 and December 28, 2007. These financial statements are the responsibility of the Company’s management.

     We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

     We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Harris Stratex Networks, Inc. and subsidiaries as of June 27, 2008, and the related consolidated statements of operations and cash flows for the year then ended, not presented herein, and in our report dated September 12, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 27, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

                        /s/ Ernst & Young LLP

Raleigh, North Carolina
February 6, 2009

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which include, without limitation, statements about the market for our technology, our strategy and competition. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. For example, the words “believes”, “anticipates”, “plans”, “expects”, “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed below under the discussions of “Risk Factors” set forth in our annual report on Form 10-K filed with the Securities and Exchange Commission on September 25, 2008. All forward looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements.

     As previously announced on July 30, 2008, Harris Stratex Networks, Inc. and its Audit Committee concluded that our consolidated financial statements for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005 and for the first three quarters of the fiscal year ended June 27, 2008 would be restated for the correction of errors contained in those consolidated financial statements. The effect of these restatement items reduced shareholders’ equity cumulatively by $13.2 million as of December 28, 2007. Previously reported net loss was increased by $2.2 million and $1.6 million for the quarter and two quarters ended December 28, 2007. The restatement had no impact on our net cash flows from operations, financing activities or investing activities. To correct these errors, on September 25, 2008, we filed amended quarterly reports on Form 10-Q/A for the first three quarters of fiscal 2008 and an amended annual report on Form 10-K/A for fiscal year 2007. The financial statements for the second quarter of fiscal 2008 included in this report are from the amended quarterly report on Form 10-Q/A filed with the SEC on September 25, 2008.

Overview

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is sometimes referred to in this Quarterly Report on Form 10-Q as the MD&A, is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to our condensed consolidated financial statements and related notes presented under Item 1, Financial Statements of this report. As of January 2, 2009, Harris Corporation (“Harris”) owned 100% of our Class B common stock representing approximately 56% of our total voting shares.

     The following is a list of the sections of the MD&A, together with the perspective of our management on the contents of these sections of the MD&A, which is intended to make reading these pages more productive:

	•		Results of Operations — an analysis of our consolidated results of operations and of the results in each of our three operating segments, to the extent the operating segment results are helpful to gain an understanding of our business as a whole, for the periods presented in our Condensed Consolidated Financial Statements (Unaudited).
	•		Liquidity and Capital Resources — an analysis of cash flows, sources of liquidity and resources, contractual obligations and commercial commitments.
	•		Critical Accounting Policies and Estimates — information about accounting policies and estimates that require critical judgment and about accounting pronouncements that have been issued but not yet implemented by us and their potential impact.

Quarter Ended January 2, 2009 compared with Quarter Ended December 28, 2007

     Revenue and Net Loss

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	190.9			$	181.1				5.4	%
Net loss		$	(315.4	)		$	(3.2	)			N/M
% of revenue			N/M				(1.8)	%

     Our revenue in the second quarter of fiscal 2009 was $190.9 million, an increase of $9.8 million or 5.4%, compared with the second quarter of fiscal 2008. This increase in revenue resulted from growth in Africa ($10.2 million increase) and in Europe, Middle East and Russia ($15.9 million increase) as customers in these regions continued to expand their network infrastructures. Revenue in Latin America and Asia Pacific declined by $15.7 million in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008 due to the procurement cycle of several large mobile operators in the Asia Pacific region. Revenue from some of our customers may fluctuate due to the timing of their specific procurement needs for network expansion.

     During the second quarter of fiscal 2009, Mobile Telephone Networks (“MTN”) in Africa accounted for 11% of our total revenue and Middle East Telecommunications (“METCO”) accounted for 13% of our total revenue. During the second quarter of fiscal 2008, MTN accounted for 11% of our total revenue. We have entered into several agreements with MTN and its subsidiaries and affiliates located in various countries in Africa for equipment and services which govern the relationship in the aggregate. METCO is an exclusive distributor with the right to resell equipment or sublicense software to customers in the Middle East region and has non-exclusive distribution rights to other territories. The agreement, as amended, expires on September 12, 2010 and may be renewed by the parties upon mutual agreement. The agreement may be terminated by either party upon 90 days prior written notice, upon breach of a term that is not cured within 30 days of the breach or insolvency of either party. Our agreement with METCO does not contain specific purchase commitments, therefore, revenue may fluctuate from quarter to quarter. The loss of either of these customers could adversely affect our results of operations, cash flows and financial position.

     Due to the economic slowdown and the tightening of credit among lending institutions, customers may delay or decrease their overall spending allocated for network expansion. We believe some customers have delayed or decreased spending and have not necessarily provided target dates or times as to when they expect to change their plans. We expect revenue to be in the range of $150 million to $170 million in our third quarter of fiscal 2009.

     Our net loss in the second quarter of fiscal 2009 was $315.4 million compared with a net loss of $3.2 million in the second quarter of fiscal 2008. The net loss in the second quarter of fiscal 2009 included impairment charges for goodwill and the trade name “Stratex,” a charge for increasing the valuation allowance on certain deferred tax assets, as well as the following purchase accounting adjustments and other expenses related to the acquisition and integration of Stratex and share-based compensation expense:

		Second				Second
		Fiscal				Fiscal
		Quarter				Quarter
		2009				2008
		(In millions)
Goodwill impairment charges		$	279.0			$	—
Impairment charges for the trade name “Stratex”			22.0				—
Charge for increasing the valuation allowance on certain deferred tax assets			20.8				—
Amortization of developed technology			1.8				1.7
Amortization of trade names, customer relationships and non-competition agreements			1.4				1.9
Restructuring charges			1.1				4.4
Amortization of the fair value adjustments related to fixed assets			0.6				0.7
Cost of integration activities undertaken in connection with the merger			—				3.2
Lease impairment			—				0.1
Inventory mark-downs			—				3.7
Share-based compensation expense			0.4				1.9
		$	327.1			$	17.6

     During the first quarter of fiscal 2009, we implemented a new restructuring plan (the “Fiscal 2009 Plan”) to reduce our workforce in Canada, Brazil and the U.S. During the second quarter of fiscal 2009, our restructuring charges totaled $1.1 million consisting of:

	•		Severance, retention and related charges associated with reduction in force activities totaling $1.2 million (Fiscal 2009 Plan).
	•		Facility restoration costs totaling $0.2 million at our Canadian location (Fiscal 2009 Plan).
	•		Adjustments to the restructuring liability under our 2007 restructuring plans (the “Fiscal 2007 Plans”) for changes in estimates to reduce the severance liability in Canada ($0.3 million).

     During the second quarter of fiscal 2008, we recorded an additional $4.4 million of restructuring charges in connection with the implementation of our Fiscal 2007 Plans. During the second quarter fiscal 2008, our restructuring charges consisted of:

	•		Severance, retention and related charges associated with reduction in force activities totaling $0.9 million.
	•		Lease impairment charges totaling $1.1 million from implementation of Fiscal 2007 Plans and changes in estimates related to sub-tenant activity at our U.S. and Canadian locations.
	•		Impairment of $2.3 million for the reduction in fair value of recoverable taxes in Brazil.
	•		Impairment of $0.1 million for fixed assets at our Canadian location.

     We estimate that we will record an additional $3.0 million in restructuring charges under the Fiscal 2009 Plan during the second half of fiscal 2009. Additionally, we expect to announce further restructuring plans during fiscal 2009.

     Gross Margin

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	190.9			$	181.1				5.4	%
Cost of product sales and services			(136.5	)			(132.1	)			3.3	%
Gross margin		$	54.4			$	49.0				11.0	%
% of revenue			28.5	%			27.1	%

     Gross margin in the second quarter of fiscal 2009 was $54.4 million, or 28.5% of revenue, compared with $49.0 million, or 27.1% of revenue in the second quarter of fiscal 2008. Gross margin in the second quarter of fiscal 2009 was reduced by $2.0 million which included $1.8 million for amortization of developed technology and $0.2 million of amortization of the fair value of adjustments for fixed assets acquired from Stratex. Gross margin in the second quarter of fiscal 2008 was reduced by $6.5 million which included $3.7 million in markdowns of inventory, $0.2 million of amortization of the fair value of adjustments for fixed assets acquired from Stratex, $1.7 million of amortization of developed technology and $0.9 million of merger integration costs.

  Research and Development Expenses

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	190.9			$	181.1				5.4	%
Research and development expenses		$	9.5			$	10.9				(12.8	)%
% of revenue			5.0	%			6.0	%

     Research and development (“R&D”) expenses were $9.5 million in the second quarter of fiscal 2009 compared with $10.9 million in the second quarter of fiscal 2008. As a percentage of revenue, these expenses decreased from 6.0% in the second quarter of fiscal 2008 to 5.0% in the second quarter of fiscal 2009 due to higher revenue and a decrease in spending. The decrease in spending in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008 was primarily attributable to the reduction in workforce implemented in our restructuring plans during fiscal 2008.

  Selling and Administrative Expenses

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	190.9			$	181.1				5.4	%
Selling and administrative expenses		$	32.9			$	36.2				(9.1	)%
% of revenue			17.2	%			20.0	%

     Selling and administrative (“S&A”) expenses in the second quarter of fiscal 2009 decreased to $32.9 million from $36.2 million in the second quarter of fiscal 2008. As a percentage of revenue, these expenses decreased to 17.2% of revenue in the second quarter of fiscal 2009 from 20.0% of revenue in the second quarter of fiscal 2008. During the second quarter of fiscal 2008, we incurred $2.3 million in expenses for merger integration activities. Such activities were completed prior to fiscal 2009 and no such expenses were incurred during the second quarter of fiscal 2009. Additionally, share-based compensation expenses during the second quarter of fiscal 2009 were $1.0 million less than in the same period of fiscal 2008 primarily due to an adjustment related to recording such expense for performance shares. Finally, amounts accrued under bonus plans in the second quarter of fiscal 2009 were less than in the same period in fiscal 2008 due to lower projected income for the fiscal year 2009.

  Income Taxes

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Loss before income taxes		$	(291.9	)		$	(4.8	)			N/M
(Provision for) benefit from income taxes		$	(23.5	)		$	1.6				N/M
% of loss before income taxes			N/M				(33.3	)%

     Our provision for income taxes was $23.5 million for the second quarter of fiscal 2009 consisting primarily of a $20.8 million increase in the valuation allowance for certain deferred tax assets. The provision for income taxes for the second quarters of fiscal 2009 and 2008 reflected our pre-tax loss based on our estimated annual effective tax rate. The variation between the provision for income taxes and income taxes at the U.S. Federal statutory rate of 35% was due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates.

Discussion of Business Segments

  North America Microwave Segment

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	64.8			$	63.8				1.6	%
Segment operating loss		$	(29.5	)		$	(1.3	)			N/M
% of revenue			N/M				(2.0	)%

     North America Microwave segment revenue increased by $1.0 million, or 1.6%, in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008. Revenue drivers in the North America Microwave segment included customer demand for increased bandwidth and footprint expansion and mixed-mode solutions as operators transition from legacy networks to IP networks.

     However, due to the economic slowdown and the tightening of credit among lending institutions, customers may delay or decrease their overall spending allocated for network expansion in North America. We believe some customers have delayed or decreased spending and have not necessarily provided target dates or times as to when they expect to change their plans. Consequently, we are unable to predict the impact of this on our business in North America.

     Our North America Microwave segment had operating loss of $29.5 million in the second quarter of fiscal 2009 primarily due to impairment charges for goodwill and the trade name “Stratex” of $31.8 million and $0.7 million compared with an operating loss of $1.3 million in the second quarter of fiscal 2008. The operating loss in the second quarter of fiscal 2009 also included deductions of approximately $1.6 million related to the acquisition of Stratex, $0.2 million of amortization of the fair value adjustments for fixed assets, $0.5 million for amortization of developed technology, trade names and customer relationships and $0.9 million of restructuring charges.

     By comparison, the operating loss for this segment in the second quarter of fiscal 2008 included deductions of approximately $6.5 million related to the acquisition of Stratex consisting of a $0.3 million of amortization of the fair value adjustments for fixed assets, $0.7 million for amortization of developed technology, trade names, customer relationships and non-compete agreements, and $4.3 million of restructuring charges, $0.1 million in charges for impairment of a lease agreement and $1.1 million of integration expenses undertaken in connection with the merger.

     The North America Microwave segment operating results also included $0.3 million in share-based compensation expense during the second quarter of fiscal 2009 compared with $1.8 million in the second quarter of fiscal 2008.

  International Microwave Segment

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	121.2			$	110.8				9.4	%
Segment operating loss		$	(262.3	)		$	(3.7	)			N/M
% of revenue			N/M				(3.3	)%

     International Microwave segment revenue increased by $10.4 million or 9.4% in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008. This increase resulted from growth in Africa ($10.2 million increase) and in Europe, Middle East and Russia ($15.9 million increase) as customers in these regions continued to expand their network infrastructures. Revenue in Latin America and Asia Pacific declined by $15.7 million in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008 due to the procurement cycle of several large mobile operators in the Asia Pacific region. Revenue from some of our customers may fluctuate due to the timing of their specific procurement needs for network expansion.

     Due to the economic slowdown and the tightening of credit among lending institutions, customers may delay or decrease their overall spending allocated for network expansion. In Europe, Russia and Latin America, we believe some customers have delayed or decreased spending and have not necessarily provided target dates or times as to when they expect to change their plans. Consequently, we are unable to predict the impact of this on our International Microwave segment business.

     Our International Microwave segment had an operating loss of $262.3 million in the second quarter of fiscal 2009 primarily due to impairment charges for goodwill and the trade name “Stratex” of $247.2 million and $21.3 million compared with an operating loss of $3.7 million in the second quarter of fiscal 2008. The operating loss in the second quarter of fiscal 2009 also included deductions of approximately $3.3 million for charges related to the acquisition of Stratex consisting of $0.4 million of amortization of the fair value adjustments for fixed assets, $2.7 million for amortization of developed technology, trade names and customer relationships and $0.2 million of restructuring charges. The effect of these charges on the International Microwave segment operating loss was partially offset by the increase of $10.4 million in revenue compared with the same period in the prior year.

     By comparison, the operating loss in the second quarter of fiscal 2008 included deductions of approximately $5.5 million related to the acquisition of Stratex consisting of $0.4 million of amortization of the fair value adjustments for fixed assets, $2.9 million for amortization of developed technology, trade names, customer relationships and non-compete agreements, $0.1 million of restructuring charges and $2.1 million of integration expenses associated with the merger.

     We also recorded $0.1 million in share-based compensation expense in the second quarter of fiscal 2009 and 2008 in our International Microwave segment.

  Network Operations Segment

		Quarter Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	4.9			$	6.5				(24.6	)%
Segment operating income		$	0.3			$	0.6				(50.0	)%
% of revenue			6.1	%			9.2	%

     Network Operations segment revenue decreased by 24.6% in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008 primarily due to a delay in orders from customers and a realignment of the sales force. This segment had operating income of $0.3 million in the second quarter of fiscal 2009 compared with $0.6 million in the second quarter of fiscal 2008. Revenue in this segment has been adversely impacted by the global economic slowdown.

Two Quarters Ended January 2, 2009 compared with Two Quarters Ended December 28, 2007

  Revenue and Net Loss

		Two Quarters Ended								Percentage
		January 2, 2009				December 28, 2007				Increase/(Decrease)
		(In millions, except percentages)
Revenue		$	386.7			$	353.4				9.4	%
Net loss		$	(309.8	)		$	(3.4	)			N/M
% of revenue			N/M				(1.0	)%