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, 2004

¨	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, 2005

Common Stock

46,102,093

SYMMETRICOM, INC.

FORM 10-Q

INDEX


			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets—December 31, 2004 and June 30, 2004	3

		Consolidated Statements of Operations—Three and six months ended December 31, 2004 and 2003	4

		Consolidated Statements of Cash Flows—Six months ended December 31, 2004 and 2003	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

	Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	35

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

	Item 3.	Defaults Upon Senior Securities	35

	Item 4.	Submission of Matters to a Vote of Security Holders	35

	Item 5.	Other Information	36

	Item 6.	Exhibits	36

	SIGNATURES		37

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SYMMETRICOM, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	December 31, 2004			June 30, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	53,843		$	34,213
Short-term investments		12,197			13,398

Cash and investments		66,040			47,611
Accounts receivable, net of allowance for doubtful accounts of $914 as of December 2004 and $763 as of June 2004		26,760			28,941
Inventories		24,880			27,877
Prepaids and other current assets		3,977			4,070
Deferred taxes, current		5,650			5,650

Total current assets		127,307			114,149
Property, plant and equipment, net		25,462			27,936
Goodwill, net		49,248			49,248
Other intangible assets, net		12,427			14,665
Deferred taxes, non-current		38,942			40,154
Other assets		848			938
Note receivable from employee		500			500

Total assets	$	254,734		$	247,590

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,750		$	15,372
Accrued compensation		7,599			9,661
Accrued warranty		3,769			3,194
Other accrued liabilities		12,731			12,506
Current maturities of long-term obligations		1,101			1,128

Total current liabilities		33,950			41,861
Long-term obligations		7,936			8,827
Deferred income taxes		870			418

Total liabilities		42,756			51,106

Stockholders’ equity:
Preferred stock, $0.0001 par value; 500 shares authorized, none issued		—			—
Common stock, $0.0001 par value; 70,000 shares authorized, 46,363 shares issued and 45,981 shares outstanding as of December 2004; 45,475 shares issued and 44,915 outstanding as of June 2004		179,297			174,293
Stockholder note receivable		—			(555	)
Accumulated other comprehensive gain (loss)		75			(1	)
Deferred stock-based compensation		(492	)		(1,120	)
Retained earnings		33,098			23,867

Total stockholders’ equity		211,978			196,484

Total liabilities and stockholders’ equity	$	254,734		$	247,590

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,
	2004			2003			2004			2003
Net revenue	$	47,964		$	40,953		$	99,922		$	79,431
Cost of product and services		24,115			24,174			51,764			47,407
Amortization of purchased technology		970			975			1,961			1,962
Integration and restructuring charges		—			5,199			—			5,641

Gross profit		22,879			10,605			46,197			24,421
Operating expenses:
Research and development		3,804			4,043			7,933			8,802
Selling, general and administrative		12,559			10,670			25,738			22,147
Amortization of intangibles		142			208			309			401
Integration and restructuring charges		—			1,562			—			1,890

Operating earnings (loss)		6,374			(5,878	)		12,217			(8,819	)
Interest income		222			91			367			165
Interest expense		(131	)		(154	)		(265	)		(305	)

Earnings (loss) before income taxes		6,465			(5,941	)		12,319			(8,959	)
Income tax provision (benefit)		1,882			(2,074	)		3,251			(2,836	)

Net earnings (loss) from continuing operations		4,583			(3,867	)		9,068			(6,123	)
Gain (loss) from discontinued operations, net of tax		162			18			162			(16	)

Net earnings (loss)	$	4,745		$	(3,849	)	$	9,230		$	(6,139	)

Earnings (loss) per share—basic:
Earnings (loss) from continuing operations	$	0.10		$	(0.09	)	$	0.20		$	(0.14	)
Gain (loss) from discontinued operations		—			—			—			—

Net earnings (loss)	$	0.10		$	(0.09	)	$	0.20		$	(0.14	)

Weighted average shares outstanding—basic		45,344			43,416			45,059			42,965

Earnings (loss) per share—diluted:
Earnings (loss) from continuing operations	$	0.10		$	(0.09	)	$	0.20		$	(0.14	)
Gain (loss) from discontinued operations		—			—			—			—

Net earnings (loss)	$	0.10		$	(0.09	)	$	0.20		$	(0.14	)

Weighted average shares outstanding—diluted		46,815			43,416			46,500			42,965

See notes to the consolidated financial statements.

SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended December 31,
	2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	9,068		$	(6,123	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
Gain (loss) from discontinued operations		162			(16	)
Depreciation and amortization		5,494			5,953
Deferred income taxes		1,664			(2,939	)
Amortization of deferred stock-based compensation		628			113
Changes in assets and liabilities:
Accounts receivable		2,182			(980	)
Inventories		2,996			(803	)
Prepaids and other current assets		183			(1,778	)
Accounts payable		(6,622	)		(1,009	)
Accrued compensation		(2,062	)		(3,321	)
Accrued warranty		575			120
Other accrued liabilities		(631	)		689

Net cash provided by (used for) operating activities		13,637			(10,094	)

Cash flows from investing activities:
Change in restricted cash		—			396
Purchases of short-term investments		(4,684	)		(12,394	)
Maturities of short-term investments		5,869			2,501
Purchases of property, plant and equipment, net		(782	)		(2,123	)

Net cash provided (used for) investing activities		403			(11,620	)

Cash flows from financing activities:
Loan repayment		555			—
Repayment of long-term obligations		(62	)		(824	)
Repurchase of common stock		(592	)		—
Proceeds from issuance of common stock		5,596			5,266

Net cash provided by financing activities		5,497			4,442

Effect of exchange rate changes on cash and cash equivalents		93			148

Net increase (decrease) in cash and cash equivalents		19,630			(17,124	)
Cash and cash equivalents at beginning of period		34,213			32,284

Cash and cash equivalents at end of period	$	53,843		$	15,160

Non-cash investing and financing activities:
Unrealized gain (loss) on securities, net	$	(16	)	$	132
Cash payments for:
Interest	$	265		$	319
Income taxes		768			58

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, 2004. The results of operations for the three and six months ended December 31, 2004 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending June 30, 2005.

The consolidated balance sheet at June 30, 2004 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 fiscal quarter, covered by this report ended on January 2, 2005.

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 for the account of 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 $1.7 million as of December 31, 2004, of which $0.5 million is expected to be collected by the end of fiscal 2005 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.

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. Accordingly, we recognize no compensation expense in our consolidated statements of operations with respect to options awarded to our employees with exercise prices greater than or equal to the fair value of the underlying common stock at the date of grant. However, we recognize compensation expense in our consolidated statements of operations with respect to restricted stock awarded to our employees. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” to stock-based employee compensation.


	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
	(in thousands, except for earnings (loss) per share)
Net earnings (loss), as reported	$	4,745		$	(3,849	)	$	9,230		$	(6,139	)
Add: Stock-based employee compensation expense with respect to restricted stock awards included in reported net earnings (loss), net of related tax effects		192			35			389			70
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,552	)		(336	)		(3,129	)		(829	)

Pro forma	$	3,385		$	(4,150	)	$	6,490		$	(6,898	)

Earnings (loss) per share—basic and diluted:
As reported	$	0.10		$	(0.09	)	$	0.20		$	(0.14	)
Pro forma	$	0.07		$	(0.10	)	$	0.14		$	(0.16	)

The weighted average estimated fair value of options granted was $6.53 per share in the second quarter of fiscal 2005 and $4.32 per share in the corresponding quarter of fiscal 2004. 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 2005 and 2004, respectively: expected volatility of 79.4% and 83.8%, risk-free interest rate of 3.6% and 2.9% and expected life after vesting of 2.5 years and 4.2 years.

Note 3. 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 months ended December 31, 2004, we did recognize a gain for discontinued operations of $162,000 net of taxes, for a final payment on a buy-out of a royalty obligation from a licensor of Trusted Time technology.

Note 4. Integration and restructuring charges

In connection with the acquisitions of Datum and TrueTime in fiscal 2003, we initiated an integration plan to consolidate and restructure certain functions of the pre-acquisition Datum and TrueTime operations. During fiscal 2004, a majority of our manufacturing operations were consolidated into our facility in Aguadilla, Puerto Rico and we integrated our Irvine, California manufacturing into our Beverly, Massachusetts facility. Internally, we have consolidated the Broadband Networking Division, which is now part of our Wireless /OEM Products segment, 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 Emerging Issues Task Force (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 from the integration plan 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 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, 2004, all of the accrued severance expenses from the integration plan have been paid out. The balance of the $1.1 million lease loss accrual as of December 31, 2004 will be paid over the next seven years.

During fiscal 2004, we had a restructuring plan to reduce headcount primarily in the Telecom Solution Division and to exit our Parker facility in Irvine, California, the Lindbergh Avenue facility in Livermore, California and the Brighton facility in the United Kingdom. The balance of $130,000 lease loss accrual as of December 31, 2004 will be substantially paid out by the end of fiscal 2005.

During the second quarter of fiscal 2005, we did not have any integration and restructuring charges. During the corresponding quarter of fiscal 2004, we recorded integration and restructuring charges of $6.8 million in acquisition-related costs, $5.2 million of which was recorded as cost of sales and the remaining $1.6 million as operating expenses. These $5.2 million of cost of goods charges is primarily for the closure of the former Datum Irvine, California manufacturing facility and move of production to Beverly, Massachusetts. The $1.6 million of operating expense charges relate to divisions restructuring after the acquisition of Datum and TrueTime.

The following tables show the details of the restructuring cost accruals, which consist of facilities and severance costs, for the three-month period ended December 31, 2004 and year ended June 30, 2004. The adjustments are for reclassifications of facility and benefit accruals:


	Balance at June 30, 2003		Additions		Adjustments		Payments			Balance at June 30, 2004
	(in thousands)
Facilities (October 2002 to June 2003)	$	2,165	$	306	$	361	$	(1,208	)	$	1,624
Severance and benefits (October 2002 to June 2003)		886		—		38		(924	)		—
Facilities (fiscal 2004)		—		950		—		(502	)		448
Severance and benefits (fiscal 2004)		—		1,835		—		(1,820	)		15

Total	$	3,051	$	3,091	$	399	$	(4,454	)	$	2,087


	Balance at June 30, 2004		Additions		Adjustments		Payments			Balance at December 31, 2004
	(in thousands)
Facilities (October 2002 to June 2003)	$	1,624	$	—	$	—	$	(532	)	$	1,092
Facilities (fiscal 2004)		448		—		—		(318	)		130
Severance and benefits (fiscal 2004)		15		—		—		(15	)		—

Total	$	2,087	$	—	$	—	$	(865	)	$	1,222

Note 5. New Accounting Pronouncements

The FASB issued Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities,” in January 2003, and a revised interpretation of FIN 46, or FIN 46R, 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 adoption of FIN 46R in the second quarter of fiscal year 2004 did not have an impact on our financial position, results of operations or cash flows.

In December 2003, the Securities Exchange Commission or the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition, or SAB 104, which codifies, revises and rescinds certain sections of SAB 101, Revenue Recognition in Financial Statements, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption did not have a material effect on our operating results or financial condition.

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

In December 2004, the FASB issued Interpretation No. 123R, “Share –Based Payment,” which addresses the accounting for employee stock option. This statement requires that the cost of all employees stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. This statement will be adopted in the first quarter of fiscal year 2006.

In December 2004, the FASB issued Financial Accounting Standard No.151, “Inventory Cost, an amendment of ARB No. 43, Chapter 4”. FAS 151clarifies the accounting for inventory when there are abnormal amounts of idle facility expense, freight, handling cost, and wasted material. Under existing GAAP, items such as idle facility expense, excessive wasted material (spoilage), double freight, and re-handling cost may be “so abnormal” as to require treatment as current period charges rather than recorder as adjustment to the value of the inventory. FAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The provision of this Statement shall be effective for inventory cost incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory cost incurred during fiscal years beginning after the date this Statement is issued. The adoption of FAS 151 is not expected to have a material effect on our financial position or result of operations.

Note 6. Net Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period less unvested shares of restricted common stock. For the three-month and six-month period ended December 31, 2004, the weighted average numbers of common shares outstanding and unvested restricted common stock were 45,626,767 and 282,428 shares, respectively. For the corresponding period ended December 31, 2003, the weighted average numbers of common shares outstanding and unvested shares of restricted common stock were 43,668,333 and 252,428 shares, respectively.

Diluted earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, warrants and unvested restricted stock using the treasury method, except when anti-dilutive. During the three-month and six-month period ended December 31, 2004, diluted net earnings per share included 1,413,274 and 1,470,240 weighted dilutive common equivalent shares outstanding and excluded 1,222,957 and 1,997,286 weighted anti-dilutive common equivalent shares outstanding. During the three-month and six-month period ended December 31, 2003, diluted net loss per share excluded 6,463,568 and 5,946,515 weighted common equivalent shares outstanding, as their effect was anti-dilutive. The following table reconciles the number of shares utilized in the earnings (loss) per share calculations.


	Three Months Ended December 31,					Six Months Ended December 31,
	2004		2003			2004		2003
	(in thousands, except per share amounts)
Net earnings (loss) from continuing operations	$	4,583	$	(3,867	)	$	9,068	$	(6,123	)
Gain (loss) from discontinued operations		162		18			162		(16	)

Net earnings (loss)	$	4,745	$	(3,849	)	$	9,230	$	(6,139	)

Weighted average shares outstanding—basic		45,344		43,416			45,059		42,965
Dilutive stock options		1,471		—			1,441		—

Weighted average shares outstanding—diluted		46,815		43,416			46,500		42,965

Basic earnings (loss) per share from continuing operations	$	0.10	$	(0.09	)	$	0.20	$	(0.14	)
Basic gain (loss) per share from discontinued operations		—		—			—		—

Basic net earnings (loss) per share	$	0.10	$	(0.09	)	$	0.20	$	(0.14	)

Diluted earnings (loss) per share from continuing operations	$	0.10	$	(0.09	)	$	0.20	$	(0.14	)
Diluted gain (loss) per share from discontinued operations		—		—			—		—

Diluted net earnings (loss) per share	$	0.10	$	(0.09	)	$	0.20	$	(0.14	)

Note 7. Inventories

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


	December 31, 2004		June 30, 2004
	(in thousands)
Raw materials	$	14,450	$	14,985
Work-in-process		7,780		9,486
Finished goods		2,650		3,406

Total	$	24,880	$	27,877

Note 8. Goodwill and Other Intangible Assets

Goodwill

We allocate 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. Such allocations 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; and 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.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination.

The provisions of SFAS No. 142 also require an annual goodwill impairment test or more frequently if impairment indicators arise. In testing for a potential impairment of goodwill, the provisions of SFAS No. 142 require the application of a fair value based test at the reporting unit level. The first step of the impairment test prescribed by SFAS No. 142 requires an estimate of the book value of each unit. If the estimated fair value of any unit is less than the book value, SFAS No. 142 requires an estimate of the fair value of all identifiable assets and liabilities of the unit in a manner similar to a purchase price allocation for an acquired business. This estimate requires valuations of certain internally generated and unrecognized intangible assets such as in-process research and development and developed technology. Potential goodwill impairment is measured based upon this two-step process. We performed our annual goodwill impairment test as of June 30, 2004 and 2003 and determined that goodwill was not impaired. During fiscal 2003 we recorded a goodwill impairment charge of $14.7 million associated with the goodwill recorded at the time of acquisitions of Datum and TrueTime. In addition, during fiscal 2003, we recorded a goodwill impairment charge of $11.6 million for goodwill associated with discontinued operations of the Trusted Time Division.

Long-lived Assets Including Other Intangible Assets Subject to Amortization

The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. An impairment is measured as the amount by which the carrying amount exceeds the fair value.

In October 2001, FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived-Assets to Be Disposed Of.” SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. Under SFAS No. 144, assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recorded. The Company adopted SFAS No. 144 during the first quarter of fiscal 2003. There was no impact on the Company’s financial statements as a result of adopting SFAS No. 144.

There are no changes in the carrying value of goodwill for the six months ended December 31, 2004. Other intangible assets are recorded at cost, less accumulated amortization. Other intangible assets as of December 31, 2004 consist of:


	Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets
	(in thousands)
Purchased technology	$	23,560	$	12,384	$	11,176
Customer lists, trademarks, other		3,600		2,349		1,251

Total	$	27,160	$	14,733	$	12,427

The estimated future amortization expense is as follow:


Fiscal year:	(in thousands)
2005 (remaining six months)	$	2,212
2006		4,060
2007		2,545
2008		1,328
2009		946
2010		664
2011		448
2012		224

Total amortization	$	12,427

Note 9. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of two components: net earnings (loss) and other comprehensive income (loss). Other comprehensive income (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 earnings (loss). Other comprehensive income (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 income (loss), net of tax, are as follows:


	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
	(in thousands)
Net earnings (loss)	$	4,745		$	(3,849	)	$	9,230		$	(6,139	)
Other comprehensive income (loss):
Foreign currency translation adjustments		113			46			92			148
Unrealized gain (loss) on investments, net of taxes		(19	)		26			(16	)		132

Other comprehensive income		94			72			76			280

Total comprehensive income (loss)	$	4,839		$	(3,777	)	$	9,306		$	(5,859	)

Note 10. Stock Repurchase Program

During the six months ended December 31, 2004, we repurchased 62,000 shares for an aggregate price of approximately $0.6 million. As of December 31, 2004, we have the authorization to repurchase an additional 0.6 million shares of common stock. In August 6, 2004, this policy was changed to permit the company to repurchase $1.0 million in shares of common stock per quarter without additional Board approval.


Period	Total Number of Shares Purchased	Average Price Paid per Share
October 1, 2004 through October 31, 2004	17,000	$	9.04
December 1, 2004 through December 31, 2004	45,000		9.74

Total	62,000	$	9.39

Note 11. 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.

Long-term obligations consist of:


	December 31, 2004			June 30, 2004
	(in thousands)
Capital leases	$	5,483		$	6,012
Less—current maturities		(1,031	)		(1,058	)
Lease loss accrual		548			898
Bond payable		2,510			2,545
Less—current maturities		(70	)		(70	)
Post-retirement benefits		496			500

Total	$	7,936		$	8,827

Note 12. Contingencies

In late 1996, Datum (which we acquired in October 2002) received notice of potential environmental contamination from the owner of a premises in Austin, Texas that had previously been occupied by Austron, Inc., a Datum subsidiary for 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. In May 2004, we received a demand from the owner of several adjoining lots for damages, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. The adjacent property owner has not filed suit but, if a suit is filed, we will contest it vigorously. 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 demands and claims from other 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 costs of 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 financial condition or results of operations, we do not believe our ultimate aggregate liability will have such an effect. We currently have an accrual of $0.8 million for remediation costs, appraisal fees and other ongoing monitoring costs.

We are also a party to certain other 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 or results of operations.

Note 13. 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, Global Services and Specialty Manufacturing/Other. 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. Also included in our Wireless/OEM segment are Broadband Networking products, which include GoWide, a product that provides a high-bandwidth solution for medium-sized businesses without access to optical networks. The products were reported as a segment in prior periods but due to changes in the management reporting structure are now included within the Wireless/OEM Products segment. 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 Specialty Manufacturing/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 commercial 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,
	2004			2003			2004			2003
	(in thousands, except percentages)
Net revenue:
Telecom Solutions Division:
Wireline Products	$	20,680		$	17,258		$	43,821		$	34,604
Wireless/OEM Products		7,090			8,168			16,538			15,188
Global Services		2,625			2,022			4,979			4,098
Specialty Manufacturing/Other		2,022			1,581			5,232			2,670
Timing, Test and Measurement Division		15,547			11,924			29,352			22,871

Total net revenue		47,964			40,953			99,922			79,431

Cost of sales:
Telecom Solutions Division:
Wireline Products		8,842			9,416			19,483			19,549
Wireless/OEM Products		4,753			5,911			11,296			11,340
Global Services		1,688			1,241			2,923			2,362
Specialty Manufacturing/Other		1,666			1,382			4,327			2,249
Timing, Test and Measurement Division		7,166			6,224			13,735			11,907
Other cost of sales*		970			6,174			1,961			7,603

Total cost of sales		25,085			30,348			53,725			55,010

Gross profit:
Telecom Solutions Division:
Wireline Products		11,838			7,842			24,338			15,055
Wireless/OEM Products		2,337			2,257			5,242			3,848
Global Services		937			781			2,056			1,736
Specialty Manufacturing/Other		356			199			905			421
Timing, Test and Measurement Division		8,381			5,700			15,617			10,964
Other cost of sales*		(970	)		(6,174	)		(1,961	)		(7,603	)

Total gross profit	$	22,879		$	10,605		$	46,197		$	24,421

Gross margin:
Telecom Solutions Division:
Wireline Products		57.2	%		45.4	%		55.5	%		43.5	%
Wireless/OEM Products		33.0	%		27.6	%		31.7	%		25.3	%
Global Services		35.7	%		38.6	%		41.3	%		42.4	%
Specialty Manufacturing/Other		17.6	%		12.6	%		17.3	%		15.8	%
Timing, Test and Measurement Division		53.9	%		47.8	%		53.2	%		47.9	%
Other cost of sales*		(2.0	)%		(15.1	)%		(2.0	)%		(9.6	)%
Total gross margin		47.7	%		25.9	%		46.2	%		30.7	%

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

Note 14. 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,
	2004			2003
Total accrued warranty	$	3,194		$	4,021
Provision for warranty for the period		1,312			987
Less: Actual warranty costs for the period		(737	)		(867	)

Balance at the end of the period	$	3,769		$	4,141

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, 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 risk that unprofitability in future quarters 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, commercial enterprise, 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 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 commercial enterprise sectors.

Discontinued Operations

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 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.

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.

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.

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 periodic 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 Goodwill

We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for each reporting unit. Potential goodwill impairment is measured based upon a two-step process. In the first step, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. In fiscal 2004, no impairment losses were recorded based on these evaluations. In fiscal 2003, we recorded $26.3 million goodwill impairment in fiscal 2003, $11.6 million of which related to the discontinuance of the Trusted Time Division.

Valuation of Long-Lived Assets Including Intangible Assets Subject to Amortization

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets primarily include purchased technology and trademarks. We review our intangible assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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. Any such impairment charge could be significant and could have a material adverse effect on our financial statements if and when an impairment charge is recorded. If an impairment charge were recognized, the amortization related to intangible assets would decrease during the remainder of the life of the asset. In fiscal 2004, no impairment losses were recorded based on these evaluations.

Accounting for Income Taxes

The determination of our tax provision is subject to judgments and estimates due to our 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 at the end of fiscal year 2006. The change in tax law may affect our future tax rate.

The carrying value of our net deferred tax assets, which are 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 deferred tax assets. We evaluate the weight of all available evidence in determining whether it is more likely than not that some portion of the deferred tax assets will not be realized. 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. A portion of our tax credits is related to stock options and has a valuation allowance because of uncertainty regarding 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, 2004 and 2003.


	Three Months Ended December 31,				Six Months Ended December 31,
	2004		2003		2004		2003
Net revenue
Telecom Solutions Division:
Wireline Products	43.1	%	42.1	%	43.9	%	43.6	%
Wireless/OEM Products	14.8	%	19.9	%	16.6	%	19.1	%
Global Services	5.5	%	4.9	%	5.0	%	5.2	%
Specialty Manufacturing/Other	4.2	%	3.9	%	5.2	%	3.4	%
Timing, Test and Measurement Division	32.4	%	29.2	%	29.3	%	28.7	%

	100.0	%	100.0	%	100.0	%	100.0	%

Cost of products and services	50.3	%	59.0	%	51.8	%	59.7	%
Amortization of purchased technology	2.0	%	2.4	%	2.0	%	2.5	%
Integration and restructuring charges	—	%	12.7	%	—	%	7.1	%
Gross profit	47.7	%	25.9	%	46.2	%	30.7	%

Operating expenses:
Research and development	7.9	%	9.9	%	7.9	%	11.1	%
Selling, general and administrative	26.2	%	26.1	%	25.8	%	27.9	%
Amortization of intangibles	0.3	%	0.5	%	0.3	%	0.5	%
Integration and restructuring charges	—	%	3.8	%	—	%	2.4	%
Operating earnings (loss)	13.3	%	(14.4	)%	12.2	%	(11.1	)%
Interest income	0.5	%	0.2	%	0.4	%	0.2	%
Interest expense	(0.3	)%	(0.4	)%	(0.3	)%	(0.4	)%
Earnings (loss) before income taxes	13.5	%	(14.5	)%	12.3	%	(11.3	)%
Income tax provision (benefit)	3.9	%	(5.1	)%	3.3	%	(3.6	)%
Net earnings (loss) from continuing operations	9.6	%	(9.4	)%	9.1	%	(7.7	)%
Gain (loss) from discontinued operations, net of tax	0.3	%	0.0	%	0.2	%	(0.0	)%
Net earnings (loss)	9.9	%	(9.4	)%	9.2	%	(7.7	)%

Net Revenue:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2004		2003		Percentage Change		2004		2003		Percentage Change
Net Revenue
Wireline Products (in thousands)	$	20,680	$	17,258	19.8	%	$	43,821	$	34,604	26.6	%
Wireless/OEM Products Products (in thousands)		7,090		8,168	(13.2	)		16,538		15,188	8.9
Global Services (in thousands)		2,625		2,022	29.8			4,979		4,098	21.5
Specialty Manufacturing/Other (in thousands)		2,022		1,581	27.9			5,232		2,670	96.0
Timing, Test and Measurement Division (in thousands)		15,547		11,924	30.4			29,352		22,871	28.3

Total Net Revenue (in thousands)	$	47,964	$	40,953	17.1	%	$	99,922	$	79,431	25.8	%

Net revenue consists of sales of product, software licenses and services. In the second quarter of fiscal 2005, net revenue increased by $7.0 million from $41.0 million in the corresponding quarter of fiscal 2004 to $48.0 million. The increase in net revenue was attributable to the Wireline products increase of $3.4 million or 19.8% due primarily to a $2.5 million shipment to Costa Rica for that country’s next-generation sync network, the Timing, Test and Measurement segment increase of $3.6 million or 30.4% as military-related purchases of our timing solutions for mobile communication applications drove a significant portion of the sales growth, the Global Services segment revenue increase of $0.6 million or 29.8% is primarily due to product sales volume increases,

and Specialty Manufacturing increase of $0.4 million or 27.9% is due to overall increases in the electronics industry. These revenue increases were partially offset by a $1.1 million or 13.2% reduction in Wireless segment revenue due to reported softness in the wireless industry

In the first six months of fiscal 2005, net revenue increased by $20.5 million or 25.8% from $79.4 million in the corresponding period of fiscal 2004 to $99.9 million. The increase in net revenue was attributable to the Wireline products increase of $9.2 million or 26.6% due primarily to high sales of upgrade equipment to three major customers, including a $4.4 million sale in the first fiscal quarter and the aforementioned $2.5 million shipment to Costa Rica for that country’s next-generation sync network, the Timing, Test and Measurement segment increased $6.5 million or 28.3% as military-related purchases of our timing solutions for mobile communication applications drove a significant portion of the sales growth, the Global Services segment revenue increased $0.9 million or 21.5% primarily due to product sales volumes increases, Specialty Manufacturing increased $2.6 million or 96.0% due to overall increases in the electronics industry, and a $1.4 million or 8.9% increase in Wireless segment revenue.

Cost of Revenue:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2004		2003		Percentage Change		2004		2003		Percentage Change
Cost of products and services (in thousands)	$	24,115	$	24,174	(0.2	)%	$	51,764	$	47,407	9.2	%
Amortization of purchased technology (in thousands)		970		975	(0.5	)		1,961		1,962	(0.1	)
Integration and restructuring charges (in thousands)		—		5,199	(100.0	)		—		5,641	(100.0	)

Total Cost of Revenue (in thousands)	$	25,085	$	30,348	(17.3	)%	$	53,725	$	55,010	(2.3	)%

Cost of products and services remained constant during the second quarter of fiscal 2005 at $24.1 million despite a $7.0 million increase in revenue due to cost savings, including the transfer of production from Irvine, California to Beverly, Massachusetts., internal manufacturing of key components rather than outsourcing and fixed costs savings on higher sales volume. In addition, favorable sales mix due to higher volume of Wireline and Timing, Test and Measurement higher gross margin products and selling price increases in April 2004 favorably impacted our cost of products and services.

Amortization of purchased technology remained constant during the second quarter at $1.0 million. The second fiscal quarter of 2005 had no charges for integration and restructuring as compared to the $5.2 million charge in the same quarter of the prior year primarily for the closure of the Irvine, California. manufacturing facility and the move of production to Beverly, Massachusetts.

In the first six months of fiscal 2005, cost of products and services increased $4.4 million or 9.2% from $47.4 million in the corresponding period of fiscal 2004 to $51.7 million. This increase is lower than the revenue increase of 25.8% for the same period due to the same costs savings, favorable mix and selling price increases mentioned above.

Amortization of purchased technology remained constant during the six-month period ended December 31, 2004 at $2.0 million. The six month period ended December 31, 2004 had no charges for integration and restructuring as compared to the $5.6 million charge in the same period of the prior year primarily for the closure of the Irvine, California manufacturing facility and the move of production to Beverly, Massachusetts.

Gross Profit:


	Three Months Ended December 31,						Percentage Change		Six Months Ended December 31,						Percentage Change
	2004			2003			Percentage Change		2004			2003			Percentage Change
Gross Profit (in thousands)	$	22,879		$	10,605		115.7	%	$	46,197		$	24,421		89.2	%
Gross Margin (in percentage)		47.7	%		25.9	%				46.2	%		30.7	%

Gross profit as a percentage of net revenue was 47.7% in the second quarter of fiscal 2005 compared to 25.9% in the corresponding quarter of fiscal 2004. Of the 21.8% increase in gross margin, 12.7% was due to the absence of integration and restructuring charges in the second fiscal quarter of 2005 compared to $5.2 million in the same quarter of prior year, and the remaining gross margin improvement of 9.1% was attributable to the items discussed in the cost of revenue discussion of cost savings, favorable sales mix, selling price increases, and fixed cost savings due to higher volume.

In the first six months of fiscal 2005, gross profit as a percentage of net revenue was 46.2% compared to 30.7% in the corresponding period of fiscal 2004. Of the 15.5% increase in gross margin, 7.1% was due to the absence of integration and restructuring charges in the first six months of fiscal 2005 compared to $5.6 million in the same quarter of prior year, and the remaining gross margin improvement of 8.4% was attributable to the items discussed in the cost of revenue discussion of cost savings, favorable sales mix, selling price increases, and fixed cost savings due to higher volume.

Operating Expenses:

Research and development:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2004		2003		Percentage Change		2004		2003		Percentage Change
Research and development expense (in thousands)	$	3,804	$	4,043	(5.9	)%	$	7,933	$	8,802	(9.9	)%

Research and development expenses consist primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses were $3.8 million during the second quarter of fiscal 2005 compared to $4.0 million for the corresponding period of fiscal 2004. The overall decrease in the research and development expense was primarily due to the reduction in force of the research and development employees at the Irvine, California site that closed in December 2003.

For the first six months of fiscal 2005, research and development expenses were $7.9 million compared to $8.8 million for the corresponding quarter of fiscal 2004. The overall decrease in the research and development expenses was primarily due to the reduction in force mentioned above.

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.

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


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2004		2003		Percentage Change		2004		2003		Percentage Change
Selling, general and administrative, including amortization of intangible assets (in thousands)	$	12,701	$	10,878	16.8	%	$	26,047	$	22,548	15.5	%

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 departments and part of the amortization expenses of our intangible assets. These expenses increased 16.8% to $12.7 million for the second quarter of fiscal 2005 compared to $10.9 million for the corresponding quarter of fiscal 2004. The increase in selling, general and administrative expenses was attributable primarily to salary increases for employees effective July 2004, hiring of three new senior sales and marketing executives, severance expense for a senior sales executive from the Datum acquisition, additional compensation expense due to accelerated vesting of 50% of restricted stock grants to senior executives pursuant to the terms thereof, and higher commission expense due to higher sales volume. These expense increases were partially offset by a benefit of expense reductions of $360,000 for recovery of old Datum receivables that had been fully reserved and an expense reduction of $368,000 due to an adjustment for a reserve for repayment of a collected Datum receivable to a bankrupt customer.

For the first six months of fiscal 2005, selling, general and administrative expenses, including the amortization of intangibles, increased 15.5% to $26.0 million, compared to $22.5 million for the corresponding period of fiscal 2004. This increase is primarily attributable to salary increases for employees effective July 2004, hiring of three new senior sales and marketing executives, severance expense for a senior sales executive from the Datum acquisition, additional compensation expense due to accelerated vesting of restricted stock grants to senior executives pursuant to the terms thereof, and higher commission expense due to higher sales volume. These expense increases were partially offset by a benefit of expense reductions of $360,000 for recovery of old Datum receivables that had been fully reserved and an expense reduction of $368,000 due to an adjustment for a reserve for repayment of a collected Datum receivable to a bankrupt customer. This increase is also attributable to the impact of an additional week of employee salaries since the first fiscal quarter of 2005 had 14 weeks rather than 13 weeks in the same period of 2004.

We anticipate a charge of $1.0 million in our fiscal third quarter 2005 for non-cash compensation.

Integration and restructuring charges:


	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2004		2003		Percentage Change		2004		2003		Percentage Change
Integration and restructuring charges (in thousands)	$	—	$	1,562	(100.0	)%	$	—	$	1,890	(100.0	)%

During the second quarter of fiscal 2005, we did not record any integration and restructuring charges. During the corresponding quarter of fiscal 2004, we recorded integration and restructuring charges of $1.6 million primarily for division restructuring for the acquisitions of Datum and TrueTime.

For the first six months of fiscal 2005, we did not have any integration and restructuring charges, compared to $1.9 million for the corresponding period of fiscal 2004, which was primarily for division restructuring following the acquisition of Datum and TrueTime.

Interest Income:


	Three Month Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change
	2004		2003		Percentage Change		2004		2003		Percentage Change
Interest Income (in thousands)	$	222	$	91	144.0	%	$	367	$	165	122.4	%

Interest income increased to $222,000 during the second quarter of fiscal 2005 compared to $91,000 during the corresponding quarter of fiscal 2004 due to a higher cash investments balance and higher average interest rates

Interest income for the first six months of fiscal 2005, increased 122.4% to $367,000 compared to $165,000 in the corresponding period of fiscal 2004 due to the same reasons mentioned above.

Interest Expense:


	Three Months Ended December 31,						Percentage Change		Six Months Ended December 31,						Percentage Change
	2004			2003			Percentage Change		2004			2003			Percentage Change
Interest Expense (in thousands)	$	(131	)	$	(154	)	(14.9	)%	$	(265	)	$	(305	)	(13.1	)%

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 consistent at $131,000 and at $265,000 in the second quarter and first six months of fiscal 2005 and in the corresponding periods of fiscal 2004.

Income Taxes:


	Three Months Ended December 31,					Percentage Change		Six Months Ended December 31,					Percentage Change
	2004		2003			Percentage Change		2004		2003			Percentage Change
Income Tax Provision (Benefit) (in thousands)	$	1,882	$	(2,074	)	190.7	%	$	3,251	$	(2,836	)	(214.6	)%

Our income tax provision from continuing operations was $1.9 million and $3.3 million in the second quarter and the first six months of fiscal 2005, respectively, compared to a tax benefit of $2.1 million and $2.8 million in the corresponding periods of fiscal

2004. Our effective tax rate (our income tax provision as a percentage of our pre-tax income) for the second quarter of fiscal 2005 was 29.1% compared to an annual rate of 48.5% for fiscal 2004. Similar to prior years, our fiscal 2005 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 our fiscal 2006.

As a result of the factors discussed above, we had net earnings of $4.7 million, or $0.10 per share, in the second quarter of fiscal 2005 compared to a net loss of $3.8 million, or $0.09 per share, during the corresponding quarter of fiscal 2004. For the first six months of fiscal 2005, we had net earnings of $9.2 million, or $0.20 per share, compared to a net loss of $6.1 million, or $0.14 per share, for the corresponding period of fiscal 2004.

Key Operating Metrics:

Key operating metrics for measuring our performance include sales backlog, contract revenue, headcount and deferred revenue. These metrics, which compare as of the end of the second quarter of fiscal 2005 with the end of the fiscal 2004, are listed below.

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 $32.2 million as of December 31, 2004, compared to $41.8 million as of June 30, 2004. Our backlog which is shippable within the next six months was $22.5 million as of December 31, 2004, compared to $27.9 million as of June 30, 2004.

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, 2004, we have approximately $4.4 million in contract revenue to be performed and recognized within the next 36 months, compared to approximately $3.4 million in contract revenue that was to be performed and recognized within the following 36 months as of June 30, 2004. These amounts have been accounted for as part of our sales backlog discussed above.

Headcount:

Our consolidated headcount as of December 31, 2004 consisted of 761 regular employees and 86 temporary employees, compared to 754 regular employees and 125 temporary employees as of June 30, 2004.

Deferred Revenue:

Deferred revenue is comprised of deferred revenue on sales of goods with special terms, which are recognized when the special terms are satisfied; 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 sales of goods with special terms was $0.6 million as of December 31, 2004, compared to $0.6 million as of June 30, 2004. Deferred revenue for maintenance contracts as of December 31, 2004 and June 30, 2004 remained consistent at $1.0 million. Deferred revenue for distributor return allowances was $0.6 million as of December 31, 2004, compared to $0.7 million as of June 30, 2004.

Liquidity and Capital Resources

As of December 31, 2004, we had a combined balance of cash and cash equivalents and short-term investments of $66.0 million, an increase of $18.4 million from June 30, 2004. Our total capital commitments outstanding as of December 31, 2004 were $1.6 million. Days sales outstanding in accounts receivable was 51 days as of December 31, 2004, a decrease from 53 days at June 30, 2004. This decrease is attributable to a higher rate of cash collections during the second quarter of fiscal 2005 compared to the fourth quarter of fiscal 2004.

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 May 1, 2004, we entered into a credit agreement with Wells Fargo Bank, National Association to obtain a revolving line of credit up to $5.0 million to be used as working capital. The line of credit will expire on March 1, 2005. No withdrawals were made as of December 31, 2004.

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 line of credit with Wells Fargo Bank described above.

Recent Accounting Pronouncements

Factors That May Affect Results

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

Although 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 three or six months of fiscal 2005 or fiscal 2004. However, we expect that we will continue to 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. 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 10% to 16% of our net revenue was generated from sales 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, our sales could decline

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.

We believe that the need for synchronization is moving further out from the core of the network (where our products are currently used) to the “edge of the network”. If this occurs, the product needed to meet the synchronization at the edge of the network will probably be products sold at lower price point, with fewer features and may be sold through OEM and redistributors markets. This would mean that competition may be greater, unit volume might increase, and gross margins may be lower.

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 our sales.

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, has experienced a general economic downturn over the last three years and is currently undergoing consolidation. 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, any continued decline in 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.

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., MicroTel International Inc. and Oscilloquartz SA. Competitors in our wireless segment include Frequency Electronics, Inc. and Trimble Navigation, Ltd. 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:

•

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;

•

changes in worldwide market and economic conditions; and

•

customers may perceive new products as deficient if there is miscommunication about product specifications.

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.

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

We had net earnings of $4.7 million for the second quarter of fiscal 2005. We also had net earnings for both the third and fourth quarters of fiscal 2004, however, we cannot assure you that we will be able to maintain operating profitability, we had net losses for the three preceding fiscal years. If we are unable to maintain operating profitability or if we incur future losses and negative cash flow, our stock price may decline.

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

•

restructuring and integration related charges;

•

goodwill impairment charges related to our recent 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, including those 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;

•

our ability to retain key employees, which could affect our ability to sell, develop and deliver our products;

•

reduced rates of growth of telecommunications services;

•

the need for synchronization at the edge of the network;

•

customers may delay upgrading their old equipment with our new products;

•

international customers may delay purchasing products for increased voice, data and video traffic;

•

customers in the wireless market may delay adding new base stations which require our products;

•

customers may experience labor strikes which could result in reduced sales volume; and

•

customers in the wireless market may switch from buying Rubidium based product which is internally manufactured to Quartz based product which is purchased and sold at a lower price point. This may result in lower revenue and gross margins.

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. If we increase the volume of product manufacturing by outside sources and decrease our internal production, we could incur higher fixed costs (per unit) and integration and restructuring charges. 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.

If we incur net losses in the future, 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

Although we had net earnings of $4.7 million for the second quarter of fiscal 2005, we had net losses for the three preceding fiscal years. Future losses may create uncertainty about the recoverability of our $43.7 million net deferred tax assets. If we record a valuation allowance against our deferred tax assets, we would record an additional tax expense, which would reduce 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 fiscal quarter, our management reviews the results of operations for that quarter and forecasts for the remainder of the fiscal year and future years to determine if it is more likely than not that a valuation allowance for the deferred tax assets is needed.

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.

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.

We may in the future have to take a lease impairment charge, which would negatively impact our operating results

As a result of the acquisitions of Datum and TrueTime, we have excess office and manufacturing space in California and Texas that we are seeking to sublease. Should we be unable to find tenants for these vacant facilities, we may have to take additional lease impairment charges in future quarters that will negatively impact our operating results.

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. Acquisitions involve risks, which include the following:

•

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; and

•

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

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

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 have received a demand from adjoining landowner and may be subject to claims from other adjoining landowners, in addition to claims for remediation, and the amount of these costs and the extent of our exposure to these demands and 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 additional 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

There are currently several international environmental protection requirements that will become mandatory in the next few years, including the following:

•

European WEEE directive (waste electrical and electronic equipment) lays out rules for equipment end of life, i.e. reuse, recycling and disposal;

•

European RoHS (restriction of hazardous substances) specifies substances we have to avoid or restrict;

•

Japanese lead-free initiative; and

•

Customers are compiling their own list of various substances they would like to restrict.

In order to comply with these requirements we will have to redesign products, change components, develop and implement manufacturing plans, and plan how to handle equipment disposal. Our customers and we are subject to various governmental regulations including the requirements of the use lead-free solder in all products, 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 our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products. 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 36% of net revenue during the second quarter of fiscal 2005 compared to 34% of net revenue during the corresponding quarter of fiscal 2004. 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:

•

foreign currency fluctuations;

•

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

•

export restrictions;

•

longer payment cycles;

•

unexpected changes in regulatory requirements or tariffs;

•

protectionist laws and business practices that favor local competition;

•

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 results of operations could be materially affected.

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

As of December 31, 2004, 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. We performed our annual goodwill impairment test as of June 30, 2004 and determined that goodwill was not impaired. In fiscal 2004, we recorded a $14.7 million impairment charge for goodwill. In connection with the discontinuance of the Trusted Time Division in the fourth quarter of fiscal 2003, we recorded an additional $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 effective tax rate may increase during fiscal years 2004 through 2006, as the exemption is subject to a variety of limitations before it expires at the end of fiscal 2006. Additionally, the effective tax rate may fluctuate quarterly based on the Puerto Rican earnings exceeding the Section 936 limitations. An increase in our effective tax rate will increase our federal income taxes, negatively impact our net earnings and affect 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.

Investor confidence and share value may be adversely impacted if our independent auditors are unable to provide us with the attestation of the adequacy of our internal controls over financial reporting as of June 30, 2005, as required by Section 404 of the Sarbanes-Oxley Act of 2002

The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in its annual reports on Form 10-K that contain an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s independent auditors must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. This requirement will first apply to our annual report on Form 10-K for the fiscal year ending June 30, 2005. Although we intend to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements, if our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent auditors interpret the requirements, rules or regulations differently from us, then they may decline to attest to management’s assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact the market price of our shares.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Exposure

As of December 31, 2004, we had short-term investments of $12.2 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, 2004, 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 $0.3 million with the United Kingdom and $0.9 with Germany at December 31, 2004, 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 required by SEC Rule 13a-15(b), 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 quarter 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 has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

In accordance with Section 404 of the Sarbanes–Oxley Act of 2002, we are in the process of performing our annual assessment of the effectiveness of our internal control over financial reporting. In the course of performing our assessment, we have identified certain deficiencies that do not rise to the level of significant deficiencies. We are taking the appropriate steps to make the improvements necessary to remediate these deficiencies. We will consider the results of our remediation efforts and related testing as part of our year–end assessment of the effectiveness of our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity 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 28, 2004 the Company held its annual meeting of stockholders. The following summarizes the matters submitted to vote of our stockholders.

The election of the following nominees to serve on the Board of Directors constituting the full Board:


Nominee	For	Withheld
Alfred Boschulte	28,976,784	13,977,173
Robert T. Clarkson	42,476,070	477,887
Elizabeth A. Fetter	42,480,791	473,166
Robert M. Neumeister	42,470,608	483,349
Dr. Richard W. Oliver	28,995,530	13,958,427
Richard N. Snyder	29,389,530	13,564,427
Thomas W. Steipp	31,662,994	11,290,963

The ratification of the appointment of Deloitte & Touche LLP as the Company’s independent auditors for the current 2005 fiscal year.


For	Against	Abstain
42,365,949	562,233	25,776

Item 5. Other Information

Not applicable.

Item 6. Exhibits


Exhibit Number		Description of Exhibits
10.1		Summary of Bonus Plan for Executives.

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.

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 7, 2005	By:	/s/ THOMAS W. STEIPP
		Thomas W. Steipp
		Chief Executive Officer (Principal Executive Officer) and Director

DATE: February 7, 2005	By:	/s/ WILLIAM SLATER
		William Slater
		Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

Exhibit Index


Exhibit Number		Index of Exhibits
10.1		Summary of Bonus Plan for Executives.

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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