SYMMETRICOM INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-02287

SYMMETRICOM, INC.

(Exact name of registrant as specified in our charter)

Delaware

No. 95-1906306

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2300 Orchard Parkway, San Jose, California 95131-1017

(Address of principal executive offices)

Registrant’s telephone number: (408) 433-0910

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:


Class		Outstanding as of January 31, 2004
Common Stock		44,294,967

SYMMETRICOM, INC.

FORM 10-Q

INDEX


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets—December 31, 2003 and June 30, 2003	3

	Consolidated Statements of Operations—Three and six months ended December 31, 2003 and 2002	4

	Consolidated Statements of Cash Flows—Six months ended December 31, 2003 and 2002	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 2.	Changes in Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Submission of Matters to a Vote of Security Holders	34

Item 5.	Other Information	35

Item 6.	Exhibits and Reports on Form 8-K	35

SIGNATURES		36

PART I. FINANCIAL INFORMATION

Item1. Financial Statements

SYMMETRICOM, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	December 31, 2003			June 30, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	15,160		$	32,284
Restricted cash		3,000			3,396
Short-term investments		10,760			735

Cash and investments		28,920			36,415
Accounts receivable, net of allowance for doubtful accounts of $786 and $974		24,756			23,776
Inventories		29,845			29,070
Prepaids and other current assets		6,104			4,183
Deferred taxes, current		9,670			9,670

Total current assets		99,295			103,114
Property, plant and equipment, net		29,626			31,222
Goodwill, net		49,248			50,200
Other intangible assets, net		16,894			19,128
Deferred taxes, non-current		32,526			28,311
Other assets		1,272			1,415
Note receivable from employee		500			500

Total assets	$	229,361		$	233,890

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,237		$	12,246
Accrued compensation		8,870			12,191
Accrued warranty		4,141			4,021
Other accrued liabilities		10,618			10,528
Current maturities of long-term obligations		1,068			996

Total current liabilities		35,934			39,982
Long-term obligations		10,064			10,057
Deferred income taxes		411			419

Total liabilities		46,409			50,458

Stockholders’ equity:
Preferred stock, $0.0001 par value; 500 shares authorized, none issued		—			—
Common stock, $0.0001 par value; 70,000 shares authorized, 44,361 shares issued and 43,801 shares outstanding in December 2003; 43,051 shares issued and 42,491 outstanding in June 2003		164,460			159,194
Stockholder note receivable		(555	)		(555	)
Accumulated other comprehensive income (loss)		102			(178	)
Deferred stock-based compensation		(1,020	)		(1,133	)
Retained earnings		19,965			26,104

Total stockholders’ equity		182,952			183,432

Total liabilities and stockholders’ equity	$	229,361		$	233,890

See notes to the consolidated financial statements.

SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
Net revenue	$	40,953		$	39,967		$	79,431		$	58,250
Cost of product and services		24,174			23,727			47,407			35,606
Amortization of purchased technology		975			861			1,962			1,119
Write-off of Telmax royalty		—			567			—			567
Integration and restructuring charges		5,199			43			5,641			43

Gross profit		10,605			14,769			24,421			20,915
Operating expenses:
Research and development		4,043			5,561			8,802			8,754
Selling, general and administrative		10,670			12,025			22,147			19,075
Amortization of intangibles		208			659			401			724
Integration and restructuring charges		1,562			884			1,890			1,008
Impairment of goodwill		—			15,335			—			15,335
Acquired in-process research and development		—			1,561			—			1,561

Operating loss		(5,878	)		(21,256	)		(8,819	)		(25,542	)
Loss on equity securities		—			(252	)		—			(450	)
Interest income		91			169			165			358
Interest expense		(154	)		(147	)		(305	)		(296	)

Loss before income taxes		(5,941	)		(21,486	)		(8,959	)		(25,930	)
Income tax benefit		(2,074	)		(2,122	)		(2,836	)		(3,469	)

Loss from continuing operations		(3,867	)		(19,364	)		(6,123	)		(22,461	)
Gain (loss) from discontinued operations, net of tax		18			(490	)		(16	)		(490	)

Net loss	$	(3,849	)	$	(19,854	)	$	(6,139	)	$	(22,951	)

Loss per share—basic and diluted:
Loss from continuing operations	$	(0.09	)	$	(0.54	)	$	(0.14	)	$	(0.77	)
Loss from discontinued operations		—			(0.01	)		—			(0.02	)

Net loss	$	(0.09	)	$	(0.55	)	$	(0.14	)	$	(0.79	)

Weighted average shares outstanding—basic and diluted		43,416			36,213			42,965			29,133

See notes to the consolidated financial statements.

SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended December 31,
	2003			2002
Cash flows from operating activities:
Net loss	$	(6,139	)	$	(22,951	)
Adjustments to reconcile net loss to net cash used for operating activities:
Impairment of goodwill		—			15,335
Acquired in-process research and development		—			1,561
Depreciation and amortization		5,953			4,932
Deferred income taxes		(2,939	)		(1,765	)
Loss on equity securities		—			450
Amortization of deferred stock-based compensation		113			—
Changes in assets and liabilities:
Accounts receivable		(980	)		(3,358	)
Inventories		(803	)		4,869
Prepaids and other current assets		(1,778	)		(387	)
Accounts payable		(1,009	)		588
Accrued compensation		(3,321	)		1,329
Accrued warranty		120			372
Other accrued liabilities		689			(3,051	)

Net cash used for operating activities		(10,094	)		(2,076	)

Cash flows from investing activities:
Change in restricted cash		396			—
Purchases of short-term investments		(12,394	)		(162	)
Maturities of short-term investments		2,501			104
Proceeds from sale of equity securities		—			275
Purchases of property, plant and equipment		(2,123	)		(423	)
Acquisition and related costs, net of cash acquired		—			(2,730	)

Net cash used for investing activities		(11,620	)		(2,936	)

Cash flows from financing activities:
Repayment of long-term obligations		(824	)		(590	)
Proceeds from issuance of common stock		5,266			240
Repurchase of common stock		—			(802	)

Net cash provided by (used for) financing activities		4,442			(1,152	)

Effect of exchange rate changes on cash and cash equivalents		148			137
Net decrease in cash and cash equivalents		(17,124	)		(6,027	)
Cash and cash equivalents at beginning of period		32,284			52,521

Cash and cash equivalents at end of period	$	15,160		$	46,494

Non-cash investing and financing activities:
Unrealized gain (loss) on securities, net	$	132		$	(297	)
Deferred taxes on unrealized loss		—			(63	)
Cash payments for:
Interest	$	319		$	297
Income taxes		58			235

See notes to the consolidated financial statements.

SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The consolidated financial statements included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of the management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Symmetricom’s Annual Report on Form 10-K for the year ended June 30, 2003. The results of operations for the three and six months ended December 31, 2003 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending June 30, 2004.

The consolidated balance sheet at June 30, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Note 2. Summary of Significant Accounting Policies

Fiscal Period

Symmetricom’s fiscal period ends on the Sunday closest to month end. For ease of presentation, all periods are presented as if they ended on month end. All references to the quarter refer to Symmetricom’s fiscal quarter. Our current fiscal quarter ended on December 28, 2003.

Revenue Recognition

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

We assess collectibility based on the creditworthiness of the customer and past transaction history. We perform on-going credit evaluations of our customers and do not require collateral from our customers. For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. If we determine that collection of a fee is not reasonably assured, we recognize the revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash. We commonly have transactions that involve sales of both product and services to our customers. Product revenue is generated from the sale of synchronization and timing equipment with embedded software that is essential to product functionality. We account for these transactions in accordance with the rules applicable to software revenue recognition. Service revenue is recognized as the services are performed, provided collection of the related receivable is probable. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we defer an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense when orders are shipped, at which time the commission is both earned and payable.

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period is recognized under the percentage of completion method of accounting. Under this method, revenue recognition is principally based upon the costs incurred relative to the total estimated costs to complete the individual contracts. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. A contract is determined to be substantially complete when the physical deliverables are completed, shipped and accepted. Unbilled receivables totaled $2.1 million as of December 31, 2003, of which $1.1 million is expected to be collected by the end of fiscal 2004 and the remainder in subsequent years. Any anticipated losses on contracts are fully charged to operations as soon as they are determinable.

Use of Estimates

The preparation of financial statements is in conformity with the generally accepted accounting principles in the United States of America. This requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include allowances for doubtful accounts receivable, valuation of goodwill and intangible assets, and valuation of deferred tax assets.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the presentation adopted in the current period. Such reclassification did not change the previously reported revenues, operating loss or net loss amounts.

Restricted Cash

Restricted cash consists primarily of a certificate of deposit in conjunction with a letter of credit and funds related to a development bond.

Stock-Based Compensation

We account for employee stock-based compensation using the intrinsic-value-based method of accounting as defined under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” and its related interpretations. Therefore, we recognize no compensation expense in our consolidated statements of operations with respect to stock-based awards to our employees. However, we provide additional pro forma disclosures as required.

In December 2002, we adopted the disclosure provision of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation” to stock-based employee compensation.


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
	(in thousands, except for earnings per share)
Net loss, as reported	$	(3,849	)	$	(19,854	)	$	(6,139	)	$	(22,951	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		35			—			70			—
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(336	)		(2,315	)		(829	)		(2,834	)

Pro forma	$	(4,150	)	$	(22,169	)	$	(6,898	)	$	(25,785	)

Loss per share—basic and diluted
As reported	$	(0.09	)	$	(0.55	)	$	(0.14	)	$	(0.79	)
Pro forma	$	(0.10	)	$	(0.61	)	$	(0.16	)	$	(0.89	)

The weighted average estimated fair value of options granted was $4.32 per share in the second quarter of fiscal 2004 and $0.89 per share in the corresponding quarter of fiscal 2003. Our calculations were made using the Black-Scholes option-pricing model. The fair value of Symmetricom’s stock-based awards to employees was estimated assuming no expected dividend and the following weighted-average assumptions for the second quarter of fiscal 2004 and 2003, respectively: expected volatility of 83.8% and 88.3%, risk-free interest rate of 2.9% and 1.88% and expected life after vesting of 4.2 years and 2.1 years.

Note 3. Acquisitions

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

Acquisition of Datum

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

The purchase price was allocated to Datum’s assets and liabilities as follows (in thousands):


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

Total purchase price	$	118,938

In the first quarter of fiscal 2004, the amounts contained in the purchase price allocation were adjusted when final data on some of the preliminary estimates was received. The changes are reflected in the table above and include a $1.3 million increase in deferred tax assets identified when final tax returns were prepared. In the second quarter of fiscal 2004, the purchase price allocation was finalized. The changes are reflected in the table above and include a $304,000 increase in the accrued warranty after confirming with the customers the amount of total liabilities for the rework and a $28,000 net increase in the inventory write-off after negotiating with the vendor to finalize the liabilities.

Acquisition of TrueTime

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

The purchase price was allocated to TrueTime’s assets and liabilities as follows (in thousands):


Cash and cash equivalents	$	7,823
Property, plant and equipment		3,321
Other tangible assets		9,606
Existing technology		2,760
In-process research and development		405
Goodwill		3,274
Assumed liabilities		(4,444	)

Total purchase price	$	22,745

Note 4. Discontinued Operations

In June 2003, we discontinued the operation of the Trusted Time Division as part of our post-acquisition consolidation process. The division was acquired as part of the acquisition of Datum in October 2002. The division has been accounted for as a discontinued operation and, accordingly, the results of operations have been excluded from continuing operations in the consolidated statements of operations. During the three and six months ended December 31, 2003, we recognized a gain of $18,000 and a loss of $16,000, net of taxes, respectively.

Note 5. Integration and restructuring charges

In connection with the acquisitions of Datum and TrueTime, we initiated an integration plan to consolidate and restructure certain functions of the pre-acquisition Datum and TrueTime operations. A majority of our manufacturing operations have been consolidated into our facility in Aguadilla, Puerto Rico and we have integrated our Irvine, California manufacturing into our Beverly, Massachusetts facility. Internally, we have consolidated the Broadband Networking Division into the Telecom Solutions Division and discontinued the Trusted Time Division. Related to the acquisitions, we accrued approximately $8.3 million of restructuring costs in connection with loss on several facility leases and employee terminations. These costs have been recognized as a liability assumed in the purchase business combination in accordance with EITF Issue No. 95-3 “Recognition of Liabilities in Connection with Purchase Business Combinations” and reflected as an increase to goodwill. In addition, we expensed $1.2 million for additional lease loss accrual during the fourth quarter of fiscal 2003.

The facilities accruals represent the lease loss accruals for the Toledo Way facility in Irvine, California, the Westwind Boulevard facility in Santa Rosa, California and the Via Del Oro facility in San Jose, California. These accruals are presented net of expected sublease income. The employee terminations were for 162 personnel from manufacturing, engineering, sales, marketing and administration from the Datum and TrueTime sites in Beverly, Massachusetts; Austin, Texas; Santa Rosa, California and Irvine, California.

As of December 31, 2003, a total of $3.6 million of severance payments were made to 160 personnel and the remaining $53,000 will be paid out during the third quarter of fiscal 2004 for two employees. The balance of the $1.9 million lease loss accrual as of December 31, 2003 will be paid over the next eight years.

During the second quarter of fiscal 2004 we recorded integration and restructuring charges of $6.8 million, $5.2 million of which was recorded as cost of sales and the remaining $1.6 million was recorded as operating expenses. This $6.8 million was comprised of $5.4 million in costs in connection with the exit of our Parker facility in Irvine, California and $1.4 million in severance expenses for 35 personnel for the reduction in force primarily in the Telecom Solution Division.

Included in the $5.4 million exit costs were severance expenses of $2.6 million for 79 personnel, lease loss of $1.1 million for the Parker facility in Irvine, California, lease loss of $27,000 for the Lindbergh Avenue facility in Livermore, California, lease loss of $29,000 for the Brighton facility in United Kingdom, and other shutdown related costs for the Parker facility of $1.7 million. The balance of $1.2 million lease loss accruals at December 31, 2003 will be paid over the next two years. The balance of $1.7 million severance accruals at December 31, 2003 will be substantially paid out by March 31, 2004 for 36 personnel located at Irvine, California.

The following tables show the details of the restructuring cost accruals, which consist of facilities and severance costs, for the six-month period ended December 31, 2003 and the year ended June 30, 2003. The adjustments are for reclassifications of facility and benefit accruals (in thousands).


	Accruals Established as of October 2002		Additions		Adjustments			Payments			Balance at June 30, 2003
	(in thousands)
Facilities (October 2002 to June 2003)	$	510	$	—	$	1,790		$	(135	)	$	2,165
Severance and benefits (October 2002 to June 2003)		4,529		—		(961	)		(2,682	)		886

Total	$	5,039	$	—	$	829		$	(2,817	)	$	3,051


	Balance at June 30, 2003		Additions		Adjustments			Payments			Balance at December 31, 2003
	(in thousands)
Facilities (October 2002 to June 2003)	$	2,165	$	—	$	361		$	(615	)	$	1,911
Severance and benefits (October 2002 to June 2003)		886		—		38			(871	)		53
Facilities (fiscal 2004)		—		1,159		—			—			1,159
Severance and benefits (fiscal 2004)		—		1,685		—			—			1,685

Total	$	3,051	$	2,844	$	399		$	(1,486	)	$	4,808

Note 6. New Accounting Pronouncements

In June 2002 the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit of Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 (EITF 94-3). We adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Under SFAS No. 146, we deferred recording the accrual of facility exit costs for our Irvine, California facility until we had exited the facility (see Note 5).

In January 2003, the Emerging Issues Task Force (“EITF”), published EITF Issue 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables”, which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting, if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. There was no impact on our results of operations or financial position as a result of adopting EITF 00-21 at the beginning of fiscal year 2004.

In January 2003, The FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” and a revised interpretation of FIN 46 (“FIN 46-R”) in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company is required to adopt the provisions of FIN 46-R for those arrangements in the fourth quarter of fiscal 2004. The Company has not invested in any entities that management believes are variable interest entities, and does not expect the adoption of FIN 46-R to have an impact on the financial position, results of operations or cash flows of the Company.

Note 7. Net Loss Per Share

Basic loss per share for the three and six months ended December 31, 2003 is computed by dividing net loss by the weighted average number of common shares outstanding during the period, 43,668,333 and 43,217,804 shares, respectively, less 252,428 shares of unvested restricted common stock. No adjustments were made to the weighted average common shares outstanding for the corresponding periods in fiscal 2003. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, warrants and vested restricted stock using the treasury method except when antidilutive. During the three-month and six-month periods ended December 31, 2003 and 2002, diluted net loss per share excludes common equivalent shares outstanding, as their effect is antidilutive. The common equivalent shares outstanding during the three and six months ended December 31, 2003 were 5,694,087 shares, compared to 9,708,061 shares during the corresponding periods in fiscal 2003.


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
Loss from continuing operations	$	(3,867	)	$	(19,364	)	$	(6,123	)	$	(22,461	)
Loss from discontinued operations		18			(490	)		(16	)		(490	)

Net loss	$	(3,849	)	$	(19,854	)	$	(6,139	)	$	(22,951	)

Weighted average shares outstanding—basic and diluted		43,416			36,213			42,965			29,133
Basic and diluted loss per share from continuing operations	$	(0.09	)	$	(0.54	)	$	(0.14	)	$	(0.77	)
Basic and diluted gain per share from discontinued operations		—			(0.01	)		—			(0.02	)

Basic and diluted loss per share	$	(0.09	)	$	(0.55	)	$	(0.14	)	$	(0.79	)

Note 8. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of:


	December 31, 2003		June 30, 2003
	(in thousands)
Raw materials	$	16,376	$	19,414
Work-in-process		8,825		5,523
Finished goods		4,644		4,133

Total	$	29,845	$	29,070

Note 9. Goodwill and Other Intangible Assets

The changes in the carrying value of goodwill for the six months ended December 31, 2003 are as follows for the different segments of Symmetricom (see Note 3):


	Wireline			Wireless / OEM			Timing, Test and Measurement			Total
	(in thousands)
Balances as of July 1, 2003	$	28,175		$	7,245		$	14,780		$	50,200
Adjustments		(258	)		(282	)		(412	)		(952	)

Balances as of December 31, 2003	$	27,917		$	6,963		$	14,368		$	49,248

Other intangible assets are recorded at cost, less accumulated amortization. Other intangible assets as of December 31, 2003 consist of:


	Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets
	(in thousands)
Purchased technology	$	23,488	$	8,446	$	15,042
Customer lists, trademarks, other		3,769		1,917		1,852

Total	$	27,257	$	10,363	$	16,894

The estimated future amortization expense is as follows:


Fiscal year:	(in thousands)
2004 (remaining six months)	$	2,353
2005		4,338
2006		4,049
2007		2,545
2008		1,328
2009		946
2010		664
2011		448
2012		223

Total amortization	$	16,894

Note 10. Comprehensive Loss

Comprehensive loss is comprised of two components: net loss and other comprehensive loss. Other comprehensive loss refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net loss. Other comprehensive loss is comprised of unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale and foreign currency translation adjustments. The components of comprehensive loss, net of tax, are as follows:


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
	(in thousands)
Net loss	$	(3,849	)	$	(19,854	)	$	(6,139	)	$	(22,951	)
Other comprehensive loss:
Foreign currency translation adjustments		46			137			148			137
Unrealized gain (loss) on investments, net of taxes		26			(28	)		132			(297	)

Other comprehensive gain (loss)		72			109			280			(160	)

Total comprehensive loss	$	(3,777	)	$	(19,745	)	$	(5,859	)	$	(23,111	)

Note 11. Stock Repurchase Program

Our Board of Directors has authorized programs to repurchase our common stock. During the six months ended December 31, 2003, we did not repurchase any shares. However, as of December 31, 2003, we have the authorization to repurchase an additional 0.7 million shares of common stock.

Note 12. Long-term Obligations

In connection with the Datum acquisition, we assumed Datum’s liability relating to the $2.7 million industrial development bond that was issued by the Massachusetts Development Finance Agency on June 1, 2001, to finance the expansion by Datum of its manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate which in its judgment would permit the sale of the bonds at par. The bond is collateralized by a $2.7 million letter of credit issued under our credit facility with Wells Fargo Bank. As of December 31, 2003, we had $3.0 million of restricted cash to secure the letter of credit.

Long-term obligations consist of:


	December 31, 2003			June 30, 2003
	(in thousands)
Capital leases	$	6,496		$	6,948
Less—current maturities		(1,013	)		(936	)
Lease loss accrual		1,568			873
Bond payable		2,575			2,605
Less—current maturities		(55	)		(60	)
Postretirement benefits		493			559
Deferred revenue		—			68

Total	$	10,064		$	10,057

Note 13. Contingencies

In late 1996, Datum (which we acquired in October 2002) received notice of potential environmental contamination from the owner of premises in Austin, Texas that had previously been occupied by Austron, Inc., its wireline operation (“Austron”), prior to Datum’s acquisition of Austron in 1988. Although Austron had remediated the site pursuant to then-existing environmental regulations in connection with vacating the site in 1983, the applicable environmental regulations were modified after 1983, providing the basis for the property owners’ claim that the soil at the site contains the same contaminants that were the focus of Austron’s previous remediation efforts. In compliance with current law, Datum had established the extent of the site contamination, which extends to adjoining properties owned by third parties. We believe that we will continue to incur monitoring costs for the next several years in connection with the site contamination and may be subject to claims from adjoining landowners in addition to the claim for remediation discussed above, and the amount of such costs and the extent of our exposure to such claims cannot be determined at this time. Although there can be no assurance that the remediation efforts, the property owners’ claims or any related governmental action will not singly or in the aggregate have a material adverse effect on our business, financial condition and results of operations, we do not believe the aggregated potential liability will have such an effect. We currently have an accrual of $0.1 million regarding this potential liability.

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

Note 14. Business Segment Information

Subsequent to the acquisitions of Datum and TrueTime, we reorganized our structure and we now have a total of five reportable segments. There are four reportable segments within the Telecom Solutions Division: Wireline Products, Wireless/OEM Products, Broadband Networking Products and Global Services. The fifth reportable segment is the Timing, Test and Measurement Division. Wireline Products consist principally of Digital Clock Distributors, or DCDs, based on quartz, rubidium and Global Positioning System (“GPS”) technologies. Our Wireline Products provide highly accurate and uninterruptible timing to meet the synchronization requirements of telecommunication networks. Our Wireless/OEM base station timing products are designed to deliver stable timing to cellular/PCS base stations through a GPS receiver to capture cesium-based time signals produced by GPS satellites. Our Broadband Networking products include GoWide, a product that provides a high-bandwidth solution for medium-sized businesses without access to optical networks. Through our Global Services division, we offer a broad portfolio of services for our customers around the world. The services we offer include system planning, network audits, network monitoring, maintenance, logistics, and installation. Transmission Products and Contract Manufacturing were reported as segments in prior periods, and are now included in Other within the Telecom Solutions Division.

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

For each of our segments, we have separate financial information, including gross profit amounts, which are evaluated regularly by management in deciding how to allocate resources and in assessing performance. We do not allocate assets or specific operating expenses to these individual operating segments. Therefore, the segment information reported here includes only net revenue and gross profit.


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
	(in thousands, except percentages)
Net revenue:
Telecom Solutions Division:
Wireline Products	$	17,258		$	18,079		$	34,604		$	29,427
Wireless/OEM Products		7,619			9,436			14,342			13,977
Broadband Networking Products		549			176			846			290
Global Services		2,022			999			4,098			1,480
Other		1,581			1,117			2,670			2,916
Timing Test and Measurement Division		11,924			10,160			22,871			10,160

Total net revenue		40,953			39,967			79,431			58,250
Cost of sales:
Telecom Solutions Division:
Wireline Products		9,416			10,969			19,549			18,035
Wireless/OEM Products		5,456			6,071			10,605			9,266
Broadband Networking Products		455			153			735			252
Global Services		1,241			307			2,362			435
Other		1,382			971			2,249			2,362
Timing Test and Measurement Division		6,224			5,256			11,907			5,256
Other cost of sales*		6,174			1,471			7,603			1,729

Total cost of sales		30,348			25,198			55,010			37,335
Gross profit:
Telecom Solutions Division:
Wireline Products		7,842			7,110			15,055			11,392
Wireless/OEM Products		2,163			3,365			3,737			4,711
Broadband Networking Products		94			23			111			38
Global Services		781			692			1,736			1,045
Other		199			146			421			554
Timing Test and Measurement Division		5,700			4,904			10,964			4,904
Other cost of sales*		(6,174	)		(1,471	)		(7,603	)		(1,729	)

Total gross profit	$	10,605		$	14,769		$	24,421		$	20,915

Gross margin:
Telecom Solutions Division:
Wireline Products		45.4	%		39.3	%		43.5	%		38.7	%
Wireless/OEM Products		28.4	%		35.7	%		26.1	%		33.7	%
Broadband Networking Products		17.1	%		13.1	%		13.1	%		13.1	%
Global Services		38.6	%		69.3	%		42.4	%		70.6	%
Other		12.6	%		13.1	%		15.8	%		19.0	%
Timing Test and Measurement Division		47.8	%		48.3	%		47.9	%		48.3	%
Other cost of sales*		(15.1	)%		(3.7	)%		(9.6	)%		(3.0	)%
Total gross margin		25.9	%		37.0	%		30.7	%		35.9	%

*	Includes amortization of purchased technology and applicable integration and restructuring charges.

Note 15. Warranties

Our standard warranty agreement is one year upon shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We offer extended warranty contracts to our customers. The extended warranty is offered on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty. We accrue for anticipated warranty costs upon shipment. Our warranty reserve is based on the number of installed units, historical analysis of the volume of product returned to us under the warranty program, management’s judgment regarding anticipated rates of warranty claims and associated repair costs. We use the historical data to forecast our anticipated future warranty obligations. This analysis is updated on a quarterly basis.

Changes in our accrued warranty liability during the six-month periods are as follows:


	Six Months Ended December 31,
	2003			2002
	(In thousands)
Balance at beginning of the year	$	4,021		$	4,950
Balance for TrueTime at acquisition (as of October 4, 2002)		—			44
Balance for Datum at acquisition (as of October 29, 2002)		—			1,703

Total accrued warranty		4,021			6,697
Provision for warranty for the period		987			1,035
Less: Actual warranty costs for the period		(867	)		(2,410	)

Balance at the end of the period	$	4,141		$	5,322

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

The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes included elsewhere in this report.

When used in this discussion, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,” “will,” “intend,” “can” and similar expressions are intended to identify forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as risks relating to general economic conditions in the markets we address and the telecommunications market in general, risks related to the development of our new products and services including our entry into the Broadband Access market and the Professional Services market, the effects of competition and competitive pricing pressure, uncertainties associated with changing intellectual property laws, developments in and expenses related to litigation, increased competition in our markets, inability to obtain sufficient amounts of key components, the rescheduling or cancellations of a key customer order, the loss of a key customer, the effects of new and emerging technologies, the risk that excess inventory may result in write-offs, the risks that continued unprofitability may result in write downs of our deferred tax assets, price erosion and decreased demand, fluctuations in the rate of exchange of foreign currency, changes in our effective tax rate, market acceptance of our new products and services, technological advancements, undetected errors or defects in our products, the risks associated with our international sales, the risks associated with attempting to integrate companies we acquire, and the matters discussed in “Factors That May Affect Results.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

Symmetricom is a leading supplier of precise timing standards to industry, telecommunications, government, utilities, research centers and aerospace markets. We supply scientific and business solutions for customers who demand reliable products and engineering expertise in a variety of applications including timing, testing, verification and/or the measurement of a time and frequency-based signal. We are a recognized technology and market leader for rubidium clocks, cesium clocks and hydrogen masers. Our products include timing elements and business broadband access devices for wireline and wireless networks as well as professional services. Our products play an important role in the operation, bandwidth optimization, and quality of service of wireline, wireless and broadband communications networks. Our products enable our customers to increase both performance and efficiency in today’s evolving communications environment.

Symmetricom’s customers include worldwide public network providers, incumbent local exchange carriers (ILECs), public telephone and telegraph companies (PTTs), competitive local exchange carriers (CLECs), other telephone companies, wireless service providers, cable television operators, distributors and systems integrators, internet service providers (ISPs), and communications original equipment manufacturers (OEMs). With the addition of customers from TrueTime and Datum, we have entered into the government, defense and industry sectors.

Acquisition of Datum, TrueTime and NetMonitor

On October 4, 2002, we completed our acquisition of TrueTime. The total purchase price was approximately 2.6 million shares of our common stock and $5.0 million in cash. The acquisition of TrueTime was accounted for as a purchase.

On October 15, 2002, we acquired certain assets from NetMonitor. The acquisition was accounted for as an asset purchase. We paid $230,000 in cash for the acquired assets and incurred direct acquisition costs of approximately $30,000. The net purchase price was allocated to tangible assets of $40,000 and existing technology of $220,000.

On October 29, 2002, we completed our acquisition of Datum. The total purchase price was approximately 17.4 million shares of our common stock. The acquisition of Datum is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code and was accounted for as a purchase.

In June 2003, we discontinued the operation of the Trusted Time Division. The Trusted Time Division was acquired as part of the acquisition of Datum. The division has been accounted for as a discontinued operation and, accordingly, the results of operations have been excluded from continuing operations in the consolidated statements of operations. Certain charges related to the discontinuance of this operation, including a non-cash impairment charge for goodwill and intangibles associated with this business, were taken in fiscal 2003.

Critical Accounting Policies, Significant Judgments and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure at the date of our financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, and warranty obligations. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Symmetricom considers certain accounting policies related to revenue recognition and allowance for doubtful accounts, reserve for warranty, inventory valuation, capitalized acquisition costs, accounting for income taxes, valuation of investments and valuation of intangible assets and goodwill to be critical policies due to the estimates and judgments involved in each.

Business Combinations

We allocated the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. We engaged an independent third-party appraisal firm to assist us in determining the fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.

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

Revenue Recognition

Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products. Revenue from sales of product and software licenses is recognized when: (1) we enter into a legally binding arrangement with a customer; (2) we deliver the products; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenue from post-sale customer support is deferred and recognized ratably over the term of the support contract. Revenue from consulting and training services is recognized as the services are performed.

Warranty Reserve

Our standard warranty agreement is one year upon shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We accrue for anticipated warranty costs upon shipment. Our warranty reserve is based on the number of installed units, historical analysis of the volume of product returned to us under the warranty program, management’s judgment regarding anticipated rates of warranty claims and associated repair costs. We use the historical data to forecast our anticipated future warranty obligations. This analysis is updated on a quarterly basis. We offer extended warranty contracts on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty.

Allowance for Doubtful Accounts

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

Valuation of Inventory

Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to current economic trends, future demand, and technological obsolescence. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold.

Valuation of Investments

Our investments in publicly held companies are generally considered impaired when a decline in the fair value of an investment as measured by quoted market prices is less than its carrying value, and such a decline is not considered temporary. During the six months ended December 31, 2003 we did not record any gains or losses on equity securities, as we no longer hold corporate equity securities. We recognized a $0.5 million loss during the corresponding period of fiscal 2003 from the sale of all our investments in the common stock of Brocade, Inc. and Parthus, Inc. and a write-off for the impairment of investment in Sarantel Limited, a privately held joint venture based in the United Kingdom.

Valuation of Intangible Assets and Goodwill

We periodically evaluate our intangible assets and goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our annual assessment date is June 30. Intangible assets include goodwill, purchased technology, trademarks, and other. Factors we consider important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value, and the remaining amortization period may be adjusted. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements if and when an impairment charge is recorded. If an impairment charge is recognized, the amortization related to intangible assets would decrease during the remainder of the fiscal year. Based on these evaluations, no impairment losses were recorded during the second quarter of fiscal 2004 compared to $15.3 million impairment losses during the corresponding quarter in fiscal 2003.

Accounting for Income Taxes

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

The carrying value of our net deferred tax assets, which is made up primarily of tax deductions and net operating loss carryforwards, assumes we will be able to generate sufficient future income to fully realize these deductions. At the end of each quarter, Symmetricom management reviews the results of operations for that quarter, and forecasts for the future quarters to determine if it is more likely than not that a valuation allowance for most or all of the deferred tax assets is needed. If we do not generate sufficient future income, the realization of these deferred tax assets may be impaired, resulting in an additional income tax expense. All of our tax credits are related to stock options and have a valuation allowance because of uncertainty regarding their realization. If these tax credits are realized, the benefit will be credited to common stock.

Results of Operations

The following table presents selected items in our consolidated statements of operations as a percentage of total revenues for the three and six months ended December 31, 2003 and 2002. These results include TrueTime’s results of operations from October 4, 2002 (the acquisition date) and Datum’s results of operations from October 29, 2002 (the acquisition date).


	Three Months Ended December 31,				Six Months Ended December 31,
	2003		2002		2003		2002
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	25.9	%	37.0	%	30.7	%	35.9	%
Operating expenses:
Research and development	9.9	%	13.9	%	11.1	%	15.0	%
Selling, general and administrative, including amortization of intangibles	26.6	%	31.7	%	28.4	%	34.0	%
Integration and restructuring charges	3.8	%	2.2	%	2.4	%	1.7	%
Impairment of goodwill	—		38.4	%	—		26.3	%
Acquired in-process research and development	—		3.9	%	—		2.7	%
Operating loss	(14.4	)%	(53.2	)%	(11.1	)%	(43.9	)%
Loss on equity securities	—		(0.6	)%	—		(0.8	)%
Interest income	0.2	%	0.4	%	0.2	%	0.6	%
Interest expense	(0.4	)%	(0.4	)%	(0.4	)%	(0.5	)%
Loss from continuing operations	(9.4	)%	(48.5	)%	(7.7	)%	(38.6	)%
Loss from discontinued operations, net of tax	—		(1.2	)%	—		(0.8	)%
Net loss	(9.4	)%	(49.7	)%	(7.7	)%	(39.4	)%

Net Revenue:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Net Revenue (in thousands)	$	40,953	$	39,967	2.5	%	$	79,431	$	58,250	36.4	%

Net revenue consist of sales of product, software licenses and services. In the second quarter of fiscal 2004, net revenue increased by $1.0 million from $40.0 million in the corresponding quarter of fiscal 2003 to $41.0 million. The increase in net revenue was primarily attributable to a $1.8 million increase in revenue in the space, defense, avionics and network markets of our Timing, Test and Measurement Division, partially offset by a $0.8 million decrease in the general markets of the Telecom Solutions Division.

Of the $41.0 million in net revenue for the second quarter of fiscal 2004, $29.0 million was from our Telecom Solutions Division, which is made up of $17.3 million from our wireline products, $7.6 million from our wireless/OEM products, $0.5 million from the broadband networking products, $2.0 million from global services and $1.6 million from transmission products and contract manufacturing, and the remaining revenue of $11.9 million was from the Timing, Test and Measurement Division. For the corresponding quarter of fiscal 2003, $29.8 million was from the Telecom Solutions Division, which is made up of $18.1 million from our wireline products, $9.4 million from our wireless/OEM products, $1.0 million from global services, $1.1 million from transmission products and contract manufacturing and $0.2 million from the broadband networking products, and the remaining revenue of $10.2 million was from the Timing, Test and Measurement Division. It should be noted that in the second quarter of fiscal 2003, we were engaged in a large program that related to E911. That program has subsequently been completed and second quarter fiscal 2004 results include no income from this program.

In the first six months of fiscal 2004, net revenue increased by $21.2 million from $58.3 million in the corresponding period of fiscal 2003 to $79.4 million. The increase in net revenue was primarily attributable to the acquisition of Datum and TrueTime in October 2002. Of the $79.4 million in net revenue for the first six months of fiscal 2004, $56.6 million was from our Telecom Solutions Division, which is made up of $34.6 million from our wireline products, $14.3 million from our wireless/OEM products, $4.1 million from global services, $2.7 million from transmission products and contract manufacturing and $0.8 million from the broadband networking products, and the remaining net revenue of $22.9 million was from the Timing, Test and Measurement Division. For the corresponding period of fiscal 2003, $48.1 million was from our Telecom Solutions Division, which is made up of $29.4 million from our wireline products, $14.0 million from our wireless/OEM products, $0.3 million from the broadband networking products, $1.5 million from global services and $2.9 million from transmission products and contract manufacturing, and the remaining net revenue of $10.2 million was from the Timing, Test and Measurement Division.

Gross Profit:

Gross profit as a percentage of net revenue was 25.9% in the second quarter of fiscal 2004 compared to 37.0% in the corresponding quarter of fiscal 2003. The 11.1% decrease is comprised of a 12.6% decrease in gross profit from integration and restructuring charges in connection with the exit costs for our Parker facility located in Irvine, California and a 0.2% decrease in gross profit due to additional amortization of purchased technology resulting from the Datum and TrueTime acquisitions in fiscal 2003. These decreases in gross profit are partially offset by a 1.4% gross profit improvement from the write-off of Telmax royalty and a 0.3% improvement from cost of products and services, due primarily to a decrease in manufacturing overhead as a percentage of revenue related to production volume increases in Puerto Rico. This volume increase is a result of the transition of production from the TrueTime and Datum sites in Austin, Texas; Santa Rosa, California and Irvine, California.

In the first six months of fiscal 2004, gross profit as a percentage of net revenue was 30.7% compared to 35.9% in the corresponding period of fiscal 2003. The 5.2% decrease is comprised of a 7.0% decrease in gross profit from integration and restructuring charges in connection with the exit costs for our Parker facility located in Irvine, California and a 0.6% decrease in gross profit due to additional amortization of purchased technology resulting from the Datum and TrueTime acquisitions in fiscal 2003. These decreases in gross profits are partially offset by a 1.0% gross profit improvement from the write-off of Telmax royalty and a 1.4% improvement for cost of products and services, due primarily to a decrease in manufacturing overhead as a percentage of revenue related to production volume increases in Puerto Rico. This volume increase is a result of the transition of production from the TrueTime and Datum sites in Austin, Texas; Santa Rosa, California and Irvine, California.

Operating Expenses:

Research and development:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Research and development expense (in thousands)	$	4,043	$	5,561	(27.3	)%	$	8,802	$	8,754	0.6	%

Research and development expenses consist primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses were $4.0 million during the second quarter of fiscal 2004 compared to $5.6 million for the corresponding quarter of fiscal 2003. The overall decrease in the research and development expense was primarily due to the reduction in force after the acquisition of TrueTime and Datum.

For the first six months of fiscal 2004, research and development expenses were $8.8 million, which remains consistent with the corresponding period of fiscal 2003. Although Datum and TrueTime were not acquired until the second quarter of fiscal 2003, post-acquisition restructuring efforts have kept the six-month expenses for fiscal 2004 consistent with the respective period in fiscal 2003.

We expect to continue to support research and development efforts in order to enhance existing products and to design and develop new technologies and products. We expect research and development expense to decline as a percentage of net revenue for fiscal 2004 compared to fiscal 2003 due to reductions in headcount and expenses for the Broadband Network Division and due to reductions in headcount and expenses in San Jose, California; Austin, Texas and Irvine, California related primarily to the synergies from the acquisitions.

Selling, general and administrative, including amortization of intangible assets:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Selling, general and administrative, including amortization of intangible assets (in thousands)	$	10,878	$	12,684	(14.2	)%	$	22,548	$	19,799	13.9	%

Selling, general and administrative expense including the amortization of intangibles consists primarily of salaries, benefits, sales commissions and travel related expenses for our sales and services, finance, human resources, information technology and facilities department and part of the amortization expenses of our intangible assets. These expenses decreased 14.2% to $10.9 million for the second quarter of fiscal 2004 compared to $12.7 million for the corresponding quarter of fiscal 2003. This decrease is primarily attributable to the reductions in force after the acquisitions of TrueTime and Datum.

For the first six months of fiscal 2004, selling, general and administrative expense, including the amortization of intangibles, increased 13.9% to $22.5 million, compared to $19.8 million for the corresponding period of fiscal 2003. This increase is primarily attributable to the fact that the first quarter of fiscal 2003 did not include expense from Datum and TrueTime, which were both acquired during the second quarter of fiscal 2003. TrueTime was acquired at the beginning of the second quarter of 2003 and Datum was acquired at the end of the first month of the second fiscal quarter of 2003.

The amortization of intangible assets in operating expenses relates to certain assets that were acquired from Datum, TrueTime, NetMonitor, the Hewlett-Packard Company’s Communications Synchronization Business and Telmax. Amortization of intangibles decreased to $0.2 million in the second quarter of fiscal 2004 from $0.7 million in the corresponding quarter of fiscal 2003. The decrease is attributable to certain intangible assets from Datum and TrueTime that were expensed-in-full immediately following the acquisitions in the second quarter of fiscal 2003.

Integration and restructuring charges:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Integration and restructuring charges (in thousands)	$	1,562	$	884	76.7	%	$	1,890	$	1,008	87.5	%

During the second quarter of fiscal 2004, we recorded integration and restructuring charges of $1.6 million in acquisition-related costs and other restructuring expenses. These costs included reductions in force primarily in our Telecom Solutions Division and costs related to the closure of our Livermore, California office and our Brighton office in the United Kingdom. During the corresponding quarter of fiscal 2003, we recorded integration and restructuring charges of $0.9 million in acquisition-related costs for employee travel, consulting services and legal fees.

For the first six months of fiscal 2004, integration and restructuring charges increased to $1.9 million, compared to $1.0 million for the corresponding period of fiscal 2003. This increase is primarily attributable to the reductions in force primarily in our Telecom Solutions Division mentioned above.

Impairment of goodwill:


	Three Months Ended December 31,			Percentage Change		Six Months Ended December 31,			Percentage Change
	2003	2002				2003	2002
Impairment of goodwill (in thousands)	—	$	15,335	(100.0	)%	—	$	15,335	(100.0	)%

During fiscal 2004, we did not have any goodwill impairments. We completed the acquisition of TrueTime and Datum during the second quarter of fiscal 2003. In connection with these acquisitions, we recorded an additional $71.8 million of goodwill. This goodwill was based upon the values assigned to the transactions at the time they were announced: March 2002 for TrueTime and May 2002 for Datum. During the second quarter of fiscal 2003, management determined that these amounts were likely impaired as forecasts for anticipated revenue growth for the telecommunications industry had declined since the transactions were valued. We compared the fair values of the reporting units to their respective carrying values and determined that the carrying values for two of the reporting units were impaired. The fair values of the reporting units were estimated using the present value of estimated future cash flows based on management’s estimates of future revenues. We recorded the excess of the carrying value of the reporting units goodwill over its implied fair value as an impairment loss in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.”

Acquired in-process research and development expenses:


	Three Months Ended December 31,			Percentage Change		Six Months Ended December 31,			Percentage Change
	2003	2002				2003	2002
Acquired in-process research and development expenses (in thousands)	—	$	1,561	(100.0	)%	—	$	1,561	(100.0	)%

During fiscal 2004, we have not had purchased in-process research and development expense. However, during the corresponding periods of fiscal 2003, we allocated $1.6 million to purchased in-process research and development expense. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and have no alternative future use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. The $1.6 million represented $1.2 million from Datum and $0.4 million from TrueTime. The value of these projects was determined by estimating the discounted net cash flows from the sale of the products resulting from the completion of the projects, reduced by the portion of the revenue attributable to developed technology and the percentage of completion of the project.

The nature of the efforts to develop the purchased in-process research and development into commercially viable products principally relates to the completion of all prototyping and testing activities that are necessary to establish that the product can meet its design specification including function, features and technical performance requirements. Therefore the amount allocated to in-process research and development has been charged to operations.

Loss on equity securities:


	Three Months Ended December 31,			Percentage Change		Six Months Ended December 31,			Percentage Change
	2003	2002				2003	2002
Loss on equity securities (in thousands)	—	$	252	(100.0	)%	—	$	450	(100.0	)%

During fiscal 2004, we did not record any gains or losses on equity securities, as we no longer hold corporate equity securities. We recognized $0.3 million and $0.5 million losses during the corresponding periods of fiscal 2003 for write-off for the impairment of investment in Sarantel Limited, a privately held joint venture based in the United Kingdom, and sale of all our investments in the common stock of Brocade, Inc. and Parthus, Inc.

Interest Income:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Interest Income (in thousands)	$	91	$	169	(46.2	)%	$	165	$	358	(53.9	)%

Interest income decreased 46.2% to $0.1 million during the second quarter of fiscal 2004 compared to $0.2 million during the corresponding quarter of fiscal 2003. The decrease in interest income was primarily the result of a reduction of interest-bearing cash investments and lower average interest rates during the second quarter of fiscal 2004 compared to the corresponding quarter of fiscal 2003. Our short-term investment portfolio consists of corporate debt securities and other short-term marketable securities. Our short-term investment portfolio had previously consisted of equity securities and other short-term marketable securities. We sold all our equity securities at the end of December 2002, which resulted in cash that was utilized for the acquisitions. Interest income for the first six months of fiscal 2004 decreased 53.9% to $0.2 million compared to $0.4 million in the corresponding period of fiscal 2003.

Interest Expense:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Interest Expense (in thousands)	$	154	$	147	4.8	%	$	305	$	296	3.0	%

Interest expense consists primarily of interest on our bond payable and the capital lease for our headquarters building in San Jose, California. Interest expense remained fairly constant at $0.2 million and at $0.3 million in the second quarter and first six months of fiscal 2004 and in the corresponding periods of fiscal 2003.

Income Taxes:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2003		2002				2003		2002
Income Tax Benefit (in thousands)	$	2,074	$	2,122	(2.3	)%	$	2,836	$	3,469	18.3	%

Our income tax benefit was $2.1 million and $2.8 million in the second quarter and the first six months of fiscal 2004, respectively, compared to a tax benefit of $2.1 million and $3.5 million in the corresponding periods of fiscal 2003. Our effective tax rate (our income tax benefit as a percentage of our pre-tax loss) for fiscal 2004 is estimated to be approximately 45% compared to 26% for fiscal 2003. Our fiscal 2004 effective tax rate is also affected by the percentage of qualified Puerto Rico earnings compared to total earnings, because most of our Puerto Rico earnings is taxed under Section 936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from regular federal income taxes. The federal 936 exemption is subject to various limitations and is scheduled to expire at the end of fiscal 2006.

As a result of the factors discussed above, we incurred a net loss of $3.8 million, or $0.09 per share, in the second quarter of fiscal 2004 compared to net loss of $19.9 million, or $0.55 per share, during the corresponding quarter of fiscal 2003. For the first six months of fiscal 2004, we incurred a net loss of $6.1 million, or $0.14 per share, compared to $23.0 million, or $0.79 per share, for the corresponding period of fiscal 2003.

Key Operating Metrics:

Sales Backlog:

Our backlog consists of firm orders that have yet to be shipped to the customer, or may not be shippable to a customer until a future period. Most orders included in backlog can be rescheduled or canceled by customers without significant penalty. Historically, a substantial portion of net sales in any fiscal period has been derived from orders received during that fiscal period. Our total backlog amounted to $37.2 million as of December 31, 2003, compared to $33.4 million as of June 30, 2003. Our backlog which is shippable within the next six months was $24.4 million as of December 31, 2003, compared to $20.9 million as of June 30, 2003.

Contract Revenue:

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period is recognized under the percentage of completion method of accounting, principally based upon the costs incurred relative to the total estimated costs to complete the individual contracts. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. Any anticipated losses on contracts are fully charged to operations as soon as they are determinable. As of December 31, 2003, we have approximately $3.9 million in contract revenue to be performed and recognized within the next 36 months, compared to approximately $0.3 million in contract revenue that was to be performed and recognized within the following 36 months as of June 30, 2003.

Headcount:

Our consolidated headcount as of December 31, 2003 was 694 regular employees and 95 temporary employees, compared to 768 regular employees and 87 temporary employees as of June 30, 2003.

Deferred Revenue:

The deferred revenue listed on our consolidated balance sheet is made up of deferred revenue on maintenance contracts, which are recognized ratably over the maintenance period, and distributor return allowances, which are based on historical return averages with certain distributors. Deferred revenue for maintenance contracts was $1.7 million as of December 31, 2003, compared to $1.6 million as of June 30, 2003. Distributor return allowances were $0.7 million as of December 31, 2003, compared to $0.8 million as of June 30, 2003.

Liquidity and Capital Resources

As of December 31, 2003, we had a combined balance of cash and cash equivalents and short-term investments of $25.9 million, a decrease of $7.1 million from June 30, 2003. We also carry $3.0 million of restricted cash to back up our letter of credit. Our total capital commitments outstanding as of December 31, 2003 were $1.0 million. Days sales outstanding in accounts receivable was 55 days as of December 31, 2003, a decrease from 59 days at June 30, 2003. This decrease is attributable to a higher rate of cash collections during the second quarter of fiscal 2004 compared to the fourth quarter of fiscal 2003.

We believe that cash, cash equivalents and funds generated from operations, investments and financing activities will be sufficient to satisfy our working capital requirements and capital expenditures for the next twelve months.

On January 17, 2003, we amended Datum’s credit facility with Wells Fargo Bank. The credit facility was extended in February 2003. The credit facility included a line of credit of $3.0 million to secure the letters of credit.

On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on Datum’s behalf to finance the expansion of Datum’s manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest. The remarketing agent determines the interest rate for each rate period to be the lowest rate, which in its judgment would permit the sale of the bonds at par. The bond is collateralized by the letter of credit issued under our credit facility with Wells Fargo Bank.

As part of the merger with Datum, we assumed a warrant to purchase common stock of Datum that was held by UBS Warburg to purchase 486,754 shares of our common stock at an exercise price of $4.135 per share. The warrant was exercised in September 2003, upon which we received total cash proceeds of $2.2 million.

Recent Accounting Pronouncements

Factors That May Affect Results

Our quarterly and annual operating results have fluctuated in the past and may continue to fluctuate in the future, which could cause our stock price to decline and result in losses to our investors

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

•

the continuation of recent adverse economic conditions, particularly within the telecommunications equipment industry, which may result in further revenue declines;

•

goodwill impairment charges related to the acquisitions;

•

our ability to obtain sufficient supplies of sole or limited source components at commercially reasonable prices;

•

changes in our products or mix of sales to customers;

•

our ability to manage fluctuations in manufacturing yields of rubidium oscillators and cesium tubes;

•

our ability to manage the level and value of our inventories in relation to sales volume;

•

our ability to accurately anticipate the volume and timing of customer orders or customer cancellations;

•

our ability to collect receivables from our customers in the telecommunications industry;

•

the gain or loss of significant customers;

•

our ability to introduce new products on a timely and cost-effective basis;

•

customer delays in qualification of new products;

•

market acceptance of new or enhanced versions of our products and our competitors’ products;

•

our ability to manage increased competition and competitive pricing pressures;

•

our ability to manage fluctuations, especially declines, in the average selling prices of our products;

•

our ability to manage the long sales cycle associated with our products;

•

our ability to manage cyclical conditions in the telecommunications industry;

•

reduced rates of growth of telecommunications services and high-bandwidth applications;

•

our ability to manage the relocated manufacturing and research and development functions from our former Irvine, California facility to our Beverly, Massachusetts facility; and

•

the cost to implement processes to comply with Sarbanes-Oxley related legislation.

A significant portion of our operating and manufacturing expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. If we are unable to adjust spending in a timely manner to compensate for any unexpected future sales shortfall, our operating results will be negatively impacted. Our operations entail a high level of fixed costs and require an adequate volume of production and sales to achieve and maintain reasonable gross profit margins and net earnings. Significant decreases in demand for our products or reduction in our average selling prices, or any material delay in customer orders may negatively harm our business, financial condition and results of operations. Our future results depend in large part on growth in the markets for our products. The growth in each of these markets may depend on changes in general economic conditions; conditions related to the markets in which we compete, changes in regulatory conditions, legislation, export rules or conditions, interest rates and fluctuations in the business cycle for any particular market segment. If our quarterly or annual operating results do not meet the expectations of securities analysts and investors, the trading price of our common stock could decline significantly.

We experienced net operating losses in the past and may experience net operating losses again in the future

We had a net loss of $3.8 million for the quarter ended December 31, 2003. We cannot assure you that we will be able to achieve operating profitability. If we are unable to achieve operating profitability or if we incur future losses and negative cash flow, our stock price will likely decline.

If we continue to incur net losses, we may have to record a valuation allowance against most or all of our deferred tax assets, which would significantly increase our tax expense and hurt our net earnings.

We have incurred a net loss for each of the last ten consecutive quarters. These results create uncertainty about the recoverability of our $42 million deferred tax asset. If we record a valuation allowance against our deferred tax assets, we would record an additional tax expense, which would hurt our net earnings. In addition, these uncertainties about the recoverability of our deferred tax assets would limit our ability to recognize future deferred tax assets on our balance sheet and correspondingly reduce net earnings. At the end of each quarter of fiscal 2004, our management will review the results of operations for that quarter, and forecasts for the remaining quarters of fiscal 2004 and future years, to determine if it is more likely than not that a valuation allowance for most or all of the deferred tax assets is needed.

If we continue to incur net operating losses, we may review our expense structure for further reductions

If we continue to sustain net operating losses or low profit margins, we may reduce operating expense levels in the future, which could create future restructuring charges.

The economic downturn in the telecommunications industry has negatively impacted the demand for our products and may impair our customers’ ability to pay us

The telecommunications industry, from which we derive a significant portion of our revenue, is experiencing a general economic downturn. We do not know when or if the telecommunications markets will recover. This downturn has negatively affected many of our customers and has significantly weakened the financial condition of others. Some customers have filed for bankruptcy protection and others may do so as well. If a customer seeks bankruptcy protection it could result in nonpayment for products delivered, the cancellation of one or more contracts and the loss of a customer. In addition, the continued decline of demand in the telecommunications industry could delay decisions by some of our customers to renew their agreements or relationships with us or could delay decisions by prospective customers to make initial evaluations of our products. Reductions or delays in expenditures for our products, nonpayment for products delivered and the cancellation of contracts and the loss of customers could have a material adverse effect on our business and results of operations.

We purchase certain key components of our synchronization and timing equipment from single or limited sources and could lose sales if these sources fail to fulfill our needs

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

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

A relatively small number of customers have historically accounted for a significant portion of our net revenue. No single customer accounted for 10% or more of our net revenue during the second quarter of fiscal 2004 and the corresponding quarter of fiscal 2003. However, we expect that we will in the future depend on a relatively small number of customers for a substantial portion of our net revenue for the foreseeable future. The timing and level of sales to our largest customers have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future. A relatively small number of customers have also historically accounted for, and are expected to account for, a significant portion of the net revenue in any given fiscal period. We cannot be sure as to the timing or level of future sales to our customers. The loss of one or more of our significant customers, or a significant reduction or delay in sales to any customer, may harm our business and operating results. Major customers also have significant leverage and may attempt to change the terms, including pricing, upon which we do business, which could also harm our business and operating results.

We have direct or indirect sales pursuant to contracts with United States government agencies, which can be terminated at the convenience of the government, and our revenue would decline if the government terminated these contracts

Historically, approximately 12% to 16% of our net revenue were made to United States government agencies either directly or indirectly through subcontracts. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, we are generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. These contracts and subcontracts are either fixed price or cost reimbursable contracts. Fixed-price contracts provide fixed compensation for specified work. Under cost reimbursable contracts, we agree to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost reimbursable contracts, the potential for profit under fixed-price contracts is greater than under cost reimbursable contracts.

If we are unable to develop new products, or we are delayed in production startup, sales of our products could decline, which could reduce our revenue

The markets for our products are characterized by:

•

rapidly changing technology;

•

evolving industry standards;

•

changes in end-user requirements; and

•

frequent new product introductions.

Technological advancements could render our products obsolete and unmarketable. Our success will depend on our ability to respond to changing technologies and customer requirements and our ability to develop and introduce new and enhanced products in a cost-effective and timely manner. The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of our new products and enhancements.

The introduction of new or enhanced products also requires that we manage a smooth transition from older products to new products. Delays in new product development or delays in production startup could reduce sales of our products, which would negatively impact our revenue.

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

Our products are complex and often use state-of-the-art components, processes and techniques. When we release new products, or new versions of existing products, they may contain undetected or unresolved errors or defects. Despite testing, errors or defects may be found in new products or upgrades after the commencement of commercial shipments. Undetected errors and design flaws have occurred in the past and could occur in the future. These errors could result in delays, loss of market acceptance and sales, diversion of development resources, damage to our reputation, legal action by our customers, failure to attract new customers, and increased service and warranty costs. The occurrence of any of these factors could cause our net revenue to decline.

The telecommunications market is highly competitive, and if we are unable to compete successfully in our markets, our revenue could decline

Competition in the telecommunications industry in general, and in the markets we serve, is intense and likely to increase substantially. We face competition in all of our markets. Competitors in our synchronization products segment include Frequency Electronics, Inc., Huawei Technologies Co. Ltd., Larus, Inc. and Oscilloquartz SA. Competitors in our wireless segment include Frequency Electronics, Inc. and Trimble Navigation, Ltd. Competitors in our broadband access segment include Adtran, Inc., Cisco Systems, Inc., Efficient Networks, Inc. and Thomson Multimedia S.A. In the enterprise network timing market, we compete primarily with Meinberg and EndRun Technologies. In the cesium standards market, we compete primarily with Agilent Technologies, Inc. In the rubidium oscillators market, we compete primarily with Frequency Electronics, Inc. and Temex. In addition, certain companies, such as Perkin Elmer, Inc. that currently manufacture products for use in military applications, could enter commercial markets and compete directly with us. Competitors in our timing, test and measurement segment include Frequency Electronics, Inc., Trak Systems, Inc. (a Veritas Corporation subsidiary) and Brandywine Communications. In addition, the Telecommunications Act of 1996 permits ILECs to manufacture telecommunications equipment, which may result in increased competition. Our ability to compete successfully in the future will depend on many factors including:

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the cost-effectiveness, quality, price, service and market acceptance of our products;

•

our response to the entry of new competitors into our markets or the introduction of new products by our competitors;

•

the average selling prices received for our products;

•

our ability to keep pace with changing technology and customer requirements;

•

our continued improvement of existing products;

•

the timely development or acquisition of new or enhanced products;

•

the timing of new product introductions by our competitors or us; and

•

changes in worldwide market and economic conditions.

Many of our competitors or potential competitors are well established and have significant financial, manufacturing, technical and marketing resources. These competitors may be able to respond more quickly to new and emerging technologies and changes in customer requirements, to devote greater resources to the development, promotion and sale of products, or to deliver competitive products at lower prices. We expect to continue to experience pricing pressures from our competitors in all of our markets. If we are unable to compete by delivering new products or by delivering competitive products at lower prices, we could lose market share and our revenue could decline.

Our failure to achieve and sustain profitability with respect to our emerging businesses could negatively impact our operating results and our cash resources

Our Broadband Networking segment has a limited history of operation. This segment has incurred operating losses since its inception. The Broadband Networking segment is developing products for emerging markets, and will require further cash investments to reach profitability. If we fail to achieve and sustain profitability in this segment in a reasonable time period, or if the losses in this segment are larger than anticipated, our operating results and cash resources will suffer.

If we fail to protect our intellectual property, our competitive position could be weakened and our revenues may decline

We believe our success will depend in a large part on our ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. We rely on a combination of trademark, copyright and patent registration, contractual restrictions and internal security to establish and protect our proprietary rights. These measures may not provide sufficient protection for our trade secrets or other proprietary information. We have United States and international patents and patent applications pending that cover certain technology used by our operations. However, while we believe that our patents have value, we rely primarily on innovation, technological expertise and marketing competence to maintain our competitive position. While we intend to continue our efforts to obtain patents whenever possible, there can be no assurance that patents will be issued, or that new, or existing patents will not be challenged, invalidated or circumvented, or that the rights granted will provide us with any commercial benefit.

Third parties may assert intellectual property infringement claims, which would be difficult to defend, costly and may result in our loss of significant rights

The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Although we are currently not a party to any intellectual property litigation, from time to time we have received claims asserting that we have infringed the proprietary rights of others. We cannot assure you that third parties will not assert infringement claims against us in the future, or that any such claims will not result in costly litigation or require us to obtain a license for such intellectual property rights regardless of the merit of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms.

If we acquire other companies and are unable to smoothly integrate the businesses we acquire, our operations and financial results could be harmed

As part of our business strategy we have engaged in acquisitions in the past, including the acquisitions of TrueTime and Datum, and continue to evaluate other acquisition opportunities that could provide additional product or service offerings, technologies or additional industry expertise. Our recent acquisitions involve risks, which include the following:

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we may be exposed to unknown liabilities of the acquired business;

•

we may incur significant (one-time) write-offs;

•

we may experience problems in combining the acquired operations, technologies or products;

•

we may not realize the revenue and profits that we expect the acquired businesses to generate;

•

we may not achieve the cost savings we hope to obtain from combining the acquired operations with ours;

•

we may experience regulatory difficulties and unbudgeted expenses in attempting to complete an acquisition;

•

we may encounter unanticipated acquisition or integration costs that could cause our quarterly or annual operating results to fluctuate;

•

our management’s attention may be diverted from our core business;

•

our existing business relationships with suppliers and customers may be impaired;

•

we may not be successful in entering new markets in which we have no or limited experience;

•

key employees of the acquired businesses may have expertise and know-how, and we may not be able to retain some of these key employees, and some of them may join or start competing businesses.

•

our stockholders may be diluted if we pay for an acquisition with equity securities; and

•

our stock price may suffer if the former stockholders of any acquired companies dispose of significant numbers of shares of our common stock that they receive in the acquisition within a short period of time.

We cannot assure you that we will be able to successfully integrate any business, products, technologies or personnel from any recent or future acquisitions. If we fail to successfully integrate acquisitions or to achieve any anticipated benefits of an acquisition, our operations and business could be harmed. Additionally, we may experience difficulty integrating and managing the acquired business’ operations. For these reasons, we cannot be certain what effect acquisitions may have on our business, financial condition and results of operations.

We are subject to environmental regulations that could result in costly environmental liability that could exceed our resources

Our operations are subject to numerous international, federal, state and local environmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. While we have not experienced any significant effects on our operations from environmental regulations, changes in these regulations may require additional capital expenditures or restrict our ability to expand our operations. Failure to comply with such regulations could result in suspension or cessation of our operations or could subject us to significant liabilities. Although we periodically review our facilities and internal operations for compliance with applicable environmental regulations, these reviews are necessarily limited in scope and frequency and may not reveal all potential instances of noncompliance, possible injury or possible contamination. The liabilities arising from any noncompliance with environmental regulations, or liability resulting from accidental contamination or injury from toxic or hazardous chemicals could result in liability that exceeds our resources. The risk of liabilities increases as we acquire other companies, such as Datum, which use, or have used, hazardous substances at various current or former facilities.

Our manufacturing facility previously operated by Datum in Austin, Texas is undergoing remediation for known subsurface contamination at that facility and adjoining properties. We believe that we will incur monitoring costs for years to come in connection with this subsurface contamination. Further, we may be subject to claims from adjoining landowners, in addition to claims for remediation, and the amount of these costs and the extent of our exposure to these claims cannot be determined at this time. The determination of the existence and cost of any additional contamination could involve costly and time-consuming negotiations and litigation. Remediation activities and subsurface contamination may require us to incur unreimbursed costs and could harm on-site operations and the future use and value of the property. The remediation efforts, the property owners claims and any related governmental action may expose us to material liability and could significantly harm our business.

We are subject to various rules and regulations, which may cause us to incur significant compliance costs

Our customers and we are subject to various governmental regulations, compliance with which may cause us to incur significant expenses. If we fail to maintain satisfactory compliance with these regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties.

Our business is subject to various other significant international, federal, state and local, health and safety, packaging, product content and labor regulations. These regulations are complex, change frequently and have become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy past violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of its operations or portions of our operations, product recalls or impositions of fines and restrictions on its ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products. Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation of other agencies such as the United States Federal Communications Commission. If we fail to adequately address any of these regulations, our business may suffer.

Our customers may be subject to governmental regulations, which, if changed, could negatively impact our business results

Federal and state regulatory agencies, including the Federal Communications Commission and the various state public utility commissions and public service commissions, regulate most of our domestic telecommunications customers. Similar government oversight also exists in the international market. While we are not directly affected by this legislation, such regulation of our customers may negatively impact our business. For instance, the sale of our products may be affected by the imposition upon certain of our customers of common carrier tariffs and the taxation of telecommunications services. These regulations are continuously reviewed and changed by the various governmental agencies. Changes in current or future laws or regulations, in the United States or elsewhere, could negatively impact our business results.

Sales of a significant portion of our products to customers outside of the United States subjects us to business, economic and political risks

Our export sales, which are primarily to Western Europe, Latin America, the Far East and Canada, accounted for 34% of net revenue during the second quarter of fiscal 2004 compared to 30% of net revenue during the corresponding quarter of fiscal 2003. We anticipate that sales to customers located outside of the United States will continue to be a significant part of our net revenue for the foreseeable future. Because significant portions of our sales are to customers outside of the United States we are subject to risks, including:

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foreign currency fluctuations;

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the effects of terrorist activity and armed conflict which may disrupt general economic activity and result in revenue shortfalls;

•

the global SARS (severe acute respiratory syndrome) epidemic if it does not continue to be contained, or another epidemic;

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export restrictions;

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longer payment cycles;

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unexpected changes in regulatory requirements or tariffs;

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protectionist laws and business practices that favor local competition;

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dependence on local vendors; and

•

reduced or limited protection of intellectual property rights and political and economic instability.

To date, very few of our international revenue and cost obligations have been denominated in foreign currencies. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products more expensive, and thus, less competitive in foreign markets. A portion of our international revenues may be denominated in foreign currencies in the future, including the Euro, which will subject us to risks associated with fluctuations in these foreign currencies. We do not currently engage in foreign currency hedging activities or derivative arrangements, but may do so in the future to the extent that such obligations become more significant.

If we have significant inventories that become obsolete or cannot be sold at acceptable prices, our results may be negatively impacted

Although we believe that we currently have made adequate adjustments for inventory that has declined in value, become obsolete, or is in excess of anticipated demand, there can be no assurance that such adjustments will be adequate. If significant inventories of our products become obsolete, or are otherwise not able to be sold at favorable prices, our business could be materially affected.

We may be required to record additional goodwill impairment charges in future quarters

At December 31, 2003, we had recorded goodwill with a net book value of $49.2 million related to acquisitions of Datum, TrueTime and certain assets of Hewlett Packard Company’s Communication Synchronization Business. We test for impairment at least annually and whenever evidence of an impairment exists. In the second quarter of 2003, we recorded a $15.3 million impairment charge for goodwill. In connection with the discontinuance of the Trusted Time Division in the fourth quarter of 2003, we recorded an $11.6 million impairment of goodwill. If our future financial performance or other events indicate that the value of our recorded goodwill is impaired, we may record additional impairment charges that could have a material adverse effect on our reported results.

Increases in our effective tax rate will negatively impact our cash flow

Our effective tax rate is affected by the percentage of qualified Puerto Rican earnings compared to our total earnings. Most of our Puerto Rican earnings are taxed under Section 936 of the United States Internal Revenue Code, which exempts qualified Puerto Rican earnings from federal taxes when calculating our effective tax rate. Historically, using this exemption has reduced our effective tax rate. Our overall effective tax rate could increase during fiscal years 2004 through 2006, as the exemption will become subject to additional limitations before it expires at the end of fiscal 2006. Any increase in our effective tax rate will increase our federal income taxes and negatively impact our cash flow.

We may be subject to additional taxes from tax reviews by foreign authorities

Although we believe that we have made adequate reserves for foreign tax provisions, there can be no assurance that such reserves will be adequate until the foreign authorities have reviewed the foreign tax filings.

Our sales may be affected by the ongoing movement towards environmentally friendly manufacturing (“green” manufacturing)

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

We must be in compliance with the applicable provisions of the Sarbanes-Oxley Act, some of which we do not control

Provisions in the Sarbanes-Oxley legislation relate to our assessment of internal controls, and may require compliance with certain standards from our service providers. If those service providers do not maintain compliance with such standards, we may have to hire alternate service providers who are in compliance, or incur costs to keep our current service providers in compliance.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Exposure

As of December 31, 2003, we had short-term investments of $10.8 million. Currently our short-term investment portfolio consists of corporate debt securities. Our exposure to market risk due to fluctuations in interest rates relates primarily to our corporate debt securities, which are subject to interest rate risk inasmuch as their fair value will fall if market interest rates increase. If market interest rates were to increase or decrease immediately and uniformly by 10% from the levels prevailing at December 31, 2003, the fair value of the portfolio would not change by a material amount. We do not use derivative financial instruments to mitigate the risks inherent in these securities. However, we do attempt to reduce these risks by typically limiting the maturity date of such securities to no more than nine months, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer. In addition, we believe that we currently have the ability to hold these investments until maturity, and therefore, believe that reductions in the value of these securities attributable to short-term fluctuations in interest rates would not materially harm our business.

Foreign Currency Exchange Rate Exposure

Our exposure to market risk due to fluctuations in currency exchange rates relates primarily to the intercompany balances with our subsidiaries in the United Kingdom and Germany. Although we transact business with various countries, settlement amounts are usually based on United States currency. Transaction gains or losses have not been significant in the past and we do not presently engage in hedging activity. Based on the intercompany balances of $1.1 million with the United Kingdom and $1.0 million with Germany at December 31, 2003, a hypothetical 10% adverse change in sterling and Euro against United States dollars would not result in a material foreign exchange loss. Consequently, we do not expect that reductions in the value of such intercompany balances or of other accounts denominated in foreign currencies resulting from even a sudden or significant fluctuation in foreign exchange rates would have a direct material impact on our business.

Notwithstanding the foregoing analysis of the direct effects of interest rate and currency exchange rate fluctuations on the value of certain of our investments and accounts, the indirect effects of such fluctuations could have a materially harmful effect on our business. For example, international demand for our products is affected by foreign currency exchange rates. In addition, interest rate fluctuations may affect the buying patterns of our customers. Furthermore, interest rate and currency exchange rate fluctuations have broad influence on the general condition of the United States, foreign and global economies which could materially harm our business.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of December 31, 2003, the end of the quarterly period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In late 1996, Datum (which we acquired in October 2002) received notice of potential environmental contamination from the owner of premises in Austin, Texas that had previously been occupied by Austron, Inc., its wireline operation (“Austron”), prior to Datum’s acquisition of Austron in 1988. Although Austron had remediated the site pursuant to then-existing environmental regulations in connection with vacating the site in 1983, the applicable environmental regulations were modified after 1983, providing the basis for the property owner’s claim that the soil at the site contains the same contaminants that were the focus of Austron’s previous remediation efforts. In compliance with current law, Datum had established the extent of the site contamination, which extends to adjoining properties owned by third parties. We believe that we will continue to incur monitoring costs for the next several years in connection with the site contamination and may be subject to claims from adjoining landowners in addition to the claim for remediation discussed above, and the amount of such costs and the extent of the our exposure to such claims cannot be determined at this time. Although there can be no assurance that the remediation efforts, the property owners’ claims or any related governmental action will not singly or in the aggregate have a material adverse effect on our business, financial condition and results of operations, we do not believe the aggregated potential liability will have such an effect. We currently have an accrual of $0.1 million regarding this potential liability.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

On October 31, 2003, the Company held its annual meeting of stockholders. The following summarizes the matters submitted to a vote of our stockholders.

1. The election of the following nominees to serve on the Board of Directors:


Nominee	For	Withheld
Dr. Krish A. Prabhu	36,950,624	758,981

Thomas W. Steipp	36,957,623	751,982

Alfred Boschulte	35,790,887	1,918,718

Robert T. Clarkson	35,824,039	1,885,566

Elizabeth A. Fetter	36,217,232	1,492,373

Robert M. Neumeister	36,219,361	1,490,244

Dr. Richard W. Oliver	36,964,074	745,531

Richard N. Snyder	36,592,718	1,179,887

2. The ratification of the appointment of Deloitte & Touche LLP as the Company’s independent auditors for the current 2004 fiscal year.


For	Against	Abstain
35,516,113	2,154,832	38,660

Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


Exhibit Number		Description of Exhibits
31		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On October 28, 2003, the Company filed a current report on Form 8-K under Item 12 (“Disclosure of Results of Operations and Financial Condition”) reporting our results of operations for the quarter ended September 30, 2003. In addition, the Company filed under Item 7 (“Financial Statements and Exhibits”) the following exhibit: “Press Release dated October 28, 2003.”

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.


		SYMMETRICOM, INC. (Registrant)

DATE:	February 10, 2004	By:	/s/ THOMAS W. STEIPP
			Thomas W. Steipp
			Chief Executive Officer
			(Principal Executive Officer) and Director

DATE:	February 10, 2004	By:	/s/ WILLIAM SLATER
			William Slater
			Chief Financial Officer and Secretary
			(Principal Financial and Accounting Officer)

Exhibit Index


Exhibit Number		Index of Exhibits
31		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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