UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

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

For the transition period from to

Commission file number 0-02287

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

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

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 October 31, 2005
Common Stock		46,202,973

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SYMMETRICOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)

	September 30,			June 30,
	2005			2005
ASSETS
Current assets:
Cash and cash equivalents	$	84,114		$	105,635
Short-term investments	100,614			89,514
Cash and investments	184,728			195,149
Accounts receivable, net of allowance for doubtful accounts of $841 as of September 2005 and $874 as of June 2005	30,538			29,049
Inventories	28,090			26,698
Prepaids and other current assets	10,876			10,827
Total current assets	254,232			261,723
Property, plant and equipment, net	23,642			23,063
Goodwill	52,862			49,248
Other intangible assets, net	12,377			10,272
Deferred taxes and other assets	47,785			47,365
Note receivable from employee	500			500
Total assets	$	391,398		$	392,171

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,471		$	12,684
Accrued compensation	9,198			9,062
Accrued warranty	3,608			3,338
Other accrued liabilities	13,408			12,416
Current maturities of long-term obligations	1,153			1,110
Total current liabilities	37,838			38,610
Long-term obligations	126,594			126,967
Deferred income taxes	419			419
Total liabilities	164,851			165,996

Stockholders’ equity:
Common stock, $0.0001 par value; 70,000 shares authorized, 47,395 shares issued and 46,201 shares outstanding as of September 2005; 47,076 shares issued and 46,329 outstanding as of June 2005	183,493			184,292
Additional paid-in-capital	1,152			—
Accumulated other comprehensive loss	159			100
Deferred stock-based compensation	(1,413		)	—
Retained earnings	43,156			41,783
Total stockholders’ equity	226,547			226,175
Total liabilities and stockholders’ equity	$	391,398		$	392,171

See notes to the condensed consolidated financial statements.

SYMMETRICOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended September 30,
	2005			2004
Net revenue	$	44,267		$	51,958
Cost of product and services	22,635			27,649
Amortization of purchased technology	1,115			991
Integration and restructuring charges	126			—
Gross profit	20,391			23,318
Operating expenses:
Research and development	4,275			4,129
Selling, general and administrative	14,457			13,179
Amortization of intangibles	168			167
Income from operations	1,491			5,843
Interest income	1,555			145
Interest expense	(1,238		)	(134		)
Income before income taxes	1,808			5,854
Income tax provision	435			1,369
Net Income	$	1,373		$	4,485

Earnings per share—basic:
Net Earnings	$	0.03		$	0.10
Weighted average shares outstanding—basic	46,168			44,773

Earnings per share—diluted:
Net Earnings	$	0.03		$	0.10
Weighted average shares outstanding—diluted	47,205			46,186

See notes to the condensed consolidated financial statements.

SYMMETRICOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Three Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	1,373		$	4,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,778			2,849
Stock-based compensation	1,293			319
Changes in assets and liabilities:
Accounts receivable	(1,489		)	2,440
Inventories	(35		)	201
Prepaids and other current assets	(27		)	516
Accounts payable	(2,213		)	(4,503		)
Accrued compensation	111			(1,478		)
Accrued warranty	(172		)	391
Other accrued liabilities	953			487
Deferred income taxes	(373		)	965
Stock option income tax benefit	592			—
Net cash provided by operating activities	2,791			6,672

Cash flows from investing activities:
Purchases of short-term investments	(14,105		)	(4,422		)
Maturities of short-term investments	2,973			3
Purchases of property, plant and equipment	(1,992		)	(521		)
Acquisition and related cost, net of cash acquired	(8,032		)	—
Net cash used for investing activities	(21,156		)	(4,940		)

Cash flows from financing activities:
Repayment of long-term obligations	(291		)	(13		)
Proceeds from issuance of common stock	914			1,492
Repurchase of common stock	(3,859		)	—
Net cash (used for) provided by financing activities	(3,236		)	1,479
Effect of exchange rate changes on cash and cash equivalents	80			(21		)

Net (decrease) increase in cash and cash equivalents	(21,521		)	3,190
Cash and cash equivalents at beginning of period	105,635			34,213
Cash and cash equivalents at end of period	$	84,114		$	37,403

Non-cash investing and financing activities:
Unrealized (gain) loss on securities, net	$	(32	)	$	3
Cash (received from) payments for:
Interest	$	(1,292	)	$	135
Income taxes	80			14

See notes to the condensed consolidated financial statements.

SYMMETRICOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The condensed 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 condensed 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, 2005. The results of operations for the three months ended September 30, 2005 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending June 30, 2006.

The consolidated balance sheet at June 30, 2005 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. Acquisition

On August 1, 2005, Symmetricom, Inc. completed the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. This acquisition is expected to enhance Symmetricom’s position in the area of cesium clocks used primarily by official time authorities and metrology institutes throughout the world and to further Symmetricom’s leadership in generating high-precision frequency and timing references including rubidium, cesium and hydrogen masers. The total purchase price of approximately $8.0 million, was paid in cash. The purchase price was allocated to the assets acquired, including goodwill and the liabilities assumed based on management’s preliminary estimate of the fair value for purchase accounting purposes at the date of acquisition. Management is currently gathering additional information with respect to assets acquired and liabilities assumed. Accordingly, the purchase price allocation is preliminary and may require revisions in future periods.

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

Inventory	$	1,357
Prepaid and other current assets	92
Property, plant and equipment	82
Intangible assets	3,354
Goodwill	3,614
Liabilities assumed	(467		)
Total purchase price	$	8,032

Note 3. 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 quarters covered by this report ended on October 2, 2005 and October 3, 2004.

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 credit worthiness of the customer and past transaction history. We perform ongoing credit evaluations of our customers and do not require collateral from our customers. For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. If we

determine that collection of a fee is not reasonably assured, we recognize the revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash. We commonly have transactions that involve sales of both product and services to our customers. Product revenue is generated from the sale of synchronization and timing equipment with embedded software that is essential to product functionality. We account for these transactions in accordance with the rules applicable to software revenue recognition. Service revenue is recognized as the services are performed, provided collection of the related receivable is probable. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we defer an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense when orders are shipped, at which time the commission is both earned and payable.

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed-price and cost-plus reimbursement. Revenue is recognized under the fixed-price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance-based award fee. 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 $1.6 million as of September 30, 2005, of which $1.1 million is expected to be collected in fiscal 2006 and the remainder in subsequent years. Any anticipated losses on contracts are charged to operations as soon as they are determinable.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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, excess and obsolete inventory, future warranty costs, stock options and valuation of deferred tax assets. Actual results could differ from those estimates.

Stock-Based Compensation

Prior to July 4, 2005, we accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The intrinsic value method of accounting resulted in compensation expense for restricted stock and restricted stock units at fair value on date of grant based on the number of shares granted and the quoted price of our common stock, and for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent we granted stock options or stock awards that were subject to an exchange offer, other modifications or performance criteria, such awards were subject to variable accounting treatment. To the extent stock awards were forfeited prior to vesting, the corresponding previously recognized expense related to the unvested portion of the awards was reversed as an offset to operating expenses.

As of July 4, 2005, we adopted Statement of Financial Accounting Standard (SFAS) No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units are determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS No. 123(R). Because we adopted SFAS No. 123(R), we no longer have employee stock awards subject to variable accounting treatment.

At September 30, 2005, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was approximately $7.7 million, net of estimated forfeitures of $1.0 million. This cost will be amortized on an accelerated method basis over a period of approximately 3 years and will be adjusted for subsequent changes in estimated forfeitures.

Prior to the adoption of SFAS No. 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task Force (EITF) Issue No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS No. 123(R) supersedes EITF Issue No. 00-15, amends SFAS No. 95, Statement of Cash Flows, and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. There were no excess tax benefits resulting from the exercise of stock-based compensation deductions reported for financial reporting purposes in the first quarter of fiscal 2006.

On March 29, 2005, the SEC published Staff Accounting Bulletin (SAB) No. 107, which provides the Staff’s views on a variety of matters relating to stock-based payments. SAB No. 107 requires stock-based compensation be classified in the same expense line items as cash compensation.

Effect of Adoption of SFAS No. 123(R)

The application of SFAS No. 123(R) had the following effect on the first quarter of fiscal 2006 reported amounts relative to amounts that would have been reported using the intrinsic value method under previous accounting (in thousands, except per share amounts):

	Using Intrinsic		SFAS 123R			As
	Value Method		Adjustments			Reported
Income from operations	$	2,784	$	(1,293	)	$	1,491
Income before income taxes	2,784		(976		)	1,808
Net Income	2,188		(815		)	1,373

Basic earnings per share
Earnings	0.05		(0.02		)	0.03

Diluted earnings per share
Earnings	0.05		(0.02		)	0.03

The weighted average estimated fair value of options granted was $3.71 per share in the first quarter of fiscal 2006 and $4.87 per share in the corresponding quarter of fiscal 2005. 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 first quarter of fiscal 2006 and 2005, as follows:

	Three Months Ended
	September 30,
	2005		2004
Expected life (in years)	2.3		2.4
Risk-free interest rate	4.1	%	3.2	%
Volatility	51.6	%	81.1	%

For fiscal year 2005, the Company used its historical volatility as its basis to estimate expected volatility. In light of recent accounting guidance related to stock options, the Company reevaluated the volatility assumptions used to estimate the value of employee stock options granted in the first quarter of fiscal 2006. Management determined that historical and implied volatility related to publicly traded options is more reflective of market conditions and a better indicator of expected volatility than historical volatility only.

Stock Option Plans

Symmetricom has an employee stock option plan under which employees and consultants may be granted non-qualified and incentive options to purchase shares of Symmetricom’s common stock. The plan was amended in fiscal 2003, in

connection with the tender offer during the fourth quarter of fiscal 2003, to effectively provide that restricted stock could be granted and repurchased for no cash purchase price. Stock appreciation rights may also be granted under this plan; however, none have been granted to date. In addition, Symmetricom has a director stock option plan under which non-employee directors are granted options each January to purchase 10,000 shares of Symmetricom’s common stock. All options have been granted at the fair market value of our common stock on the date of grant and expire no later than ten years from the date of grant. Options generally vest over three years.

Effective August 4, 2005, the Symmetricom Board approved a change in the terms for stock options granted on and after August 4, 2005. The life of a stock option grant is now 5 years instead of 10 years. Vesting terms are generally unchanged.

For the three-months ended September 30, 2005, the Company granted options to purchase 469,000 shares of its common stock and restricted stock awards for 165,000 shares. Of the 165,000 restricted shares, 18,000 were subsequently forfeited. The Company’s right to repurchase restricted shares generally lapses over the same term as the vesting period applicable to the Company’s stock options. The Company received $0.9 million from the exercise of common stock during the first quarter ended September 30, 2005.

			Options Outstanding
	Shares Available		Number of		Weighted Average
	For Grant		Shares		Exercise Price
	(In thousands, except per share amounts)
Balances at June 30, 2005	2,014		4,325		$	6.81
Granted	(469	)	469		9.43
Granted - restricted shares	(165	)	—		—
Exercised	—		(172	)	5.30
Canceled	143		(143	)	9.82
Balances at September 30, 2005	1,523		4,479		$	7.04

The Company issues new shares of common stock upon the exercise of stock options. The following table summarizes information about stock options outstanding as of September 30, 2005:

					Options Outstanding				Options Exercisable
Range of Exercise Prices					Number of Shares	Weighted Average Remaining Contractual Life	Average Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
					(In thousands)	(In years)			(In thousands)
$	2.52	—	$	4.29	397	3.86	$	3.55	297	$	3.75
$	4.33	—	$	4.33	524	6.68	4.33		524	4.33
$	4.36	—	$	4.99	453	3.43	4.76		381	4.83
$	5.02	—	$	7.08	460	4.61	5.63		451	5.62
$	7.25	—	$	7.25	717	8.84	7.25		180	7.25
$	7.29	—	$	9.19	457	5.99	7.91		314	7.87
$	9.22	—	$	9.42	502	5.36	9.39		28	9.24
$	9.46	—	$	9.54	168	7.60	9.52		85	9.50
$	9.75	—	$	9.75	685	8.51	9.75		166	9.75
$	9.77	—	$	14.81	116	8.06	11.24		26	13.35
$	2.52	—	$	14.81	4,479	6.37	$	7.04	2,452	$	5.94

The aggregate intrinsic value for the options outstanding and exercisable that were in-the-money as of September 30, 2005, were as follow:

Option	Number of Shares	Weighted Average Remaining Contractual Life	Average Weighted Average Exercise Price		Aggregate Intrinsic Value
	(In thousands)				(In thousands)
Oustanding at September 30, 2005	2,706	5.83	$	5.46	$	6,171

Exercisable at September 30, 2005	1,939	5.83	$	5.08	$	5,166

For three-months ended September 30, 2004:

Stock-based compensation in the first quarter of fiscal 2005 was determined using the intrinsic value method. The following table provides supplemental information for the first quarter of fiscal 2005 as if stock-based compensation had been computed under SFAS No. 123(R) (in thousands, except per share data):

	September 30, 2004
Net Income	$	4,485
Add: Stock-based employee compensation expense with respect to restricted stock awards included in reported net earnings, net of related tax effects	197
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(1,528		)
Pro forma	$	3,154

Earnings per share—basic and diluted:
As reported	$	0.10
Pro forma	$	0.07

Note 4. Integration and restructuring charges

During fiscal 2005, we did not have any integration and restructuring charges. In the first quarter of fiscal 2006, we recorded integration and restructuring charges of $0.1 million related to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which was recorded as cost of sales and paid out in the same quarter.

The following tables show the details of the restructuring cost accruals, which consist of facilities and severance costs, for the three-month period ended September 30, 2005 and year ended June 30, 2005.

	Balance at							Balance at
	June 30,		Expense					June 30,
	2004		Additions		Payments			2005
	(in thousands)
Facilities (October 2002 to June 2003)	$	1,624	$	—	$	(1,080	)	$	544
Facilities (fiscal 2004)	1,328		—		(926		)	402
Severance and benefits (fiscal 2004)	15		—		(15		)	—
Total severance and facilities	2,967		—		(2,021		)	946
All other integration and restructuring changes (fiscal 2004)	700		—		—			700
Total	$	3,667	$	—	$	(2,021	)	$	1,646

	Balance at							Balance at
	June 30,		Expense					September 30,
	2005		Additions		Payments			2005
	(in thousands)
Facilities (October 2002 to June 2003)	$	544	$	—	$	(269	)	$	275
Facilities (fiscal 2004)	402		—		(112		)	290
Total facilities	946		—		(381		)	565
All other integration and restructuring changes (fiscal 2004)	700		—		—			700
All other integration and restructuring changes (fiscal 2006)	—		126		(126		)	—
Total	$	1,646	$	126	$	(507	)	$	1,265

The accrued balance of the $0.6 million lease loss accrual for the facilities as of September 30, 2005 will be paid over the next six years.

Note 5. New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections. SFAS No. 154 establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. Adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

Note 6. Net Earnings Per Share

Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period less unvested shares of restricted common stock. Diluted earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding and common equivalent shares from stock options, warrants and unvested restricted stock using the treasury method, except when anti-dilutive.

The following table reconciles the number of shares utilized in the earnings per share calculations:

	Three Months Ended September 30,
	2005			2004
	(In thousands, except per share amounts)
Numerator:
Net income	$	1,373		$	4,485

Shares (Denominator):
Weighted average common shares outstanding.	46,222			44,889
Weighted average common shares outstanding subject to repurchase.	(54		)	(116		)
Weighted average shares outstanding—basic	46,168			44,773
Weighted average dilutive share equivalents from stock options and warrants.	983			1,297
Weighted average common shares dilutive subject to repurchase	54			116
Weighted average shares outstanding—diluted	47,205			46,186
Net earnings per share - basic	$	0.03		$	0.10
Net earnings per share - diluted	$	0.03		$	0.10

The following common stock equivalents were excluded from the net earnings per share calculation as their effect would have been antidilutive:

	Three Months Ended September 30,
	2005	2004
	(In thousands, except per share amounts)
Stock options & warrants	1,556	1,223
Common shares subject to repurchase	147	—
Total shares of common stock excluded from diluted net earnings per share calculation	1,703	1,223

We account for our contingent convertible subordinated notes in accordance with Emerging Issues Task Force (EITF) Issue No. 04-08, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, which requires us to include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding convertible notes in our diluted earnings per share calculation regardless of whether the market price trigger or other contingent conversion feature has been met. Because our contingent convertible notes include a mandatory cash settlement feature for the principal payment, we apply the treasury stock method. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the initial conversion price per share of $12.49. However, because our share price did not exceed $12.49, no shares associated with the contingent convertible notes were included in our diluted earnings per share as of September 30, 2005. See Note 11 to our condensed consolidated financial statements for a description of our contingent convertible subordinated notes.

Note 7. Inventories

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

	September 30,		June 30,
	2005		2005
	(in thousands)
Raw materials	$	11,773	$	12,207
Work-in-process	9,750		9,089
Finished goods	6,567		5,402
	$	28,090	$	26,698

Note 8. Goodwill and Other Intangible Assets

Goodwill

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and 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 fair 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, 2005, and no impairment losses were recorded based on these evaluations.

					Timing, Test
					and
	Wireline		OEM/Wireless		Measurement		Total
	(in thousands)
Balances as of June 30, 2005	$	27,917	$	6,963	$	14,368	$	49,248
Addition	—		—		3,614		3,614
Balances as of September 30, 2005	$	27,917	$	6,963	$	17,982	$	52,862

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. Impairment is measured as the amount by which the carrying amount exceeds the fair value.

Other intangible assets are recorded at cost, less accumulated amortization. Other intangible assets as of September 30, and June 30, 2005 consist of:

	Gross				Net
	Carrying		Accumulated		Intangible
	Amount		Amortization		Assets
			(in thousands)
Purchased technology	$	23,768	$	14,557	$	9,211
Customer lists, trademarks, other	3,730		2,669		1,061
Total as of June 30, 2005	$	27,498	$	17,226	$	10,272

Purchased technology	$	26,588	15,687		$	10,901
Customer lists, trademarks, other	4,299		2,823		1,476

Total as of September 30, 2005	$	30,887	$	18,510	$	12,377

Intangible asset amortization expense for the three months ended September 30, 2005 and September 30, 2004 was approximately $1.3 million and $1.2 million, respectively.

The estimated future amortization expense is as follow:

Fiscal year:	(in thousands)

2006 (remaining nine months)	$	3,349
2007	2,899
2008	1,678
2009	1,293
2010	1,011
2011	796
Thereafter	1,351

Total amortization	$	12,377

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 September 30,
	2005			2004
	(in thousands)
Net income	$	1,373		$	4,485
Other comprehensive income (loss):
Foreign currency translation adjustments	79			(21		)
Unrealized gain (loss) on investments, net of taxes	(20		)	3

Other comprehensive income (loss)	59			(18		)

Total comprehensive income	$	1,432		$	4,467

Note 10. Stock Repurchase Program

On August 18, 2005, the Board of Directors authorized management to repurchase up to approximately 2.6 million shares of our common stock pursuant to a repurchase program established in fiscal 2002, adding 2.0 million shares to the program previously authorized. There were approximately 46.2 million shares of Symmetricom common stock outstanding as of September 30, 2005.

During the first quarter of fiscal 2006, we repurchased 447,050 shares pursuant to the repurchase program for an aggregate price of approximately $3.9 million.

Upon termination of a senior management person during the first quarter of fiscal 2006, 18,000 shares of restricted stock were forfeited pursuant to an existing agreement with that person.

The following table provides monthly detail of our repurchases and forfeitures during the first quarter of fiscal 2006:

Period	Total Number of Shares Purchased	Average Price per Share		Total Number of Shares Forfeited
August 1, 2005 through August 31, 2005	283,550	$	8.61
September 1, 2005 through September 30, 2005	163,500	8.62		18,000
Total	447,050	$	8.62	18,000

As of September 30, 2005, the total number of shares available for repurchase was 2,112,577.

Note 11. Long-term Obligations

On June 8, 2005, the Company sold $120 million of contingent convertible subordinated notes (the “Notes”), which mature on June 15, 2025 and bear interest at the rate of 3.25% per annum. Interest on the Notes is payable semi-annually in June and December of each year beginning on December 15, 2005. The Notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt, including our indebtedness under our senior credit facilities. The Notes are structurally subordinated to all indebtedness and liabilities of our subsidiaries.

The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:

· Prior to June 15, 2023, if the common stock price for a least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the notes in effect on that 30th trading day;

· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;

· During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;

· If we have called the particular notes for redemption and the redemption has not yet occurred; or

· Upon the occurrence of specified corporate transactions.

Holders may convert any outstanding Notes into cash and, if applicable, shares of our common stock at an initial conversion price per share of $12.49 that was determined based on the reported closing price of our common stock of $9.91 per share on June 2, 2005.

Also, on or after June 20, 2012, we may redeem some or all of the Notes at any time or from time to time at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of redemption, payable in cash. Holders may require us to repurchase all or a portion of their Notes on June 15, 2012, 2015 and 2020 for a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of repurchase, payable in cash, in the event of certain change of control events related to us.

We may from time to time repurchase or redeem all or a portion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D). We may undertake such repurchase from time to time through privately negotiated or open-market transactions or other available means.

In connection with the issuance of these Notes, Symmetricom recorded bond fees of approximately $3.8 million, which are being amortized using the straight-line method over a period of seven years until fiscal 2012.

In connection with the acquisition of Datum Inc. (“Datum”) in October 2002, 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 the line of credit with Wells Fargo Bank described below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” As of September 30, 2005, the bond balance was $2.5 million.

Long-term obligations consist of:

	September 30,			June 30,
	2005			2005
	(In thousands)
Long-term obligations:
Capital lease	$	4,706		$	4,953
Less—current maturities	(1,083		)	(1,040		)
Lease loss accrual	198			279
Bond payable	2,475			2,475
Less—current maturities	(70		)	(70		)
Convertible subordinate notes	120,000			120,000
Post-retirement benefits, net	368			370
Total	$	126,594		$	126,967

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 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. 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. As of September 30, 2005, we currently have an accrual of $0.7 million for remediation costs, appraisal fees and other ongoing monitoring costs.

Under the indemnification provisions of the Company’s standard sales contracts, the Company agrees to defend the customer against third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/customer. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. As such, the Company believes the estimated fair value of these indemnification agreements is not material.

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 and results of operations.

Note 13. Business Segment Information

Subsequent to the acquisitions of Datum and TrueTime, Inc. (“TrueTime”) (both of which we acquired in October 2002) and Agilent Technologies’ Frequency and Timing Standards product line (acquired in August 2005), 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 OEM base station timing products are designed to deliver stable timing to cellular/PCS base stations through a GPS receiver to capture cesium-based time signals produced by GPS satellites. Our Broadband Networking products, which

	Three Months Ended September 30,
	2005			2004
	(in thousands, except percentages)
Net revenue:
Telecom Solutions Division:
Wireline Products	$	19,682		$	23,141
Wireless/OEM Products	5,765			9,448
Global Services	2,650			2,354
Specialty Manufacturing/Other	1,722			3,210
Timing, Test and Measurement Division	14,448			13,805
Total net revenue	44,267			51,958

Cost of sales:
Telecom Solutions Division:
Wireline Products	8,382			10,641
Wireless/OEM Products	4,277			6,543
Global Services	1,530			1,235
Specialty Manufacturing/Other	1,468			2,661
Timing, Test and Measurement Division	6,978			6,569
Other cost of sales*	1,241			991
Total cost of sales	23,876			28,640

Gross profit:
Telecom Solutions Division:
Wireline Products	11,301			12,500
Wireless/OEM Products	1,488			2,905
Global Services	1,120			1,119
Specialty Manufacturing/Other.	254			549
Timing, Test and Measurement Division	7,469			7,236
Other cost of sales*	(1,241		)	(991		)
Total gross profit	$	20,391		$	23,318

Gross margin:
Telecom Solutions Division:
Wireline Products	57.4		%	54.0		%
Wireless/OEM Products	25.8		%	30.7		%
Global Services	42.3		%	47.5		%
Specialty Manufacturing/Other	14.8		%	17.1		%
Timing, Test and Measurement Division	51.7		%	52.4		%
Other cost of sales*	(2.8		)%	(1.9		)%
Total gross margin	46.1		%	44.9		%

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

No customer accounted for 10% or more of our net revenue for the three months ended September 30, 2005 and 2004.

Note 14. Warranties

Our standard warranty agreement is one year from 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. The income from extended warranty contracts is recognized ratably over the period of contract.

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.

Changes in our accrued warranty liability during the first three-month periods of fiscal 2006 and 2005 were as follows:

	Three Months Ended September 30,
	2005			2004
	(In thousands)
Beginning balance	$	3,338		$	3,194
Provision for warranty for the year	1,115			777
Less: Actual warranty costs	(845		)	(386		)
Ending balance	$	3,608		$	3,585

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 condensed 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 synchronization and timing products of communications service providers, network equipment manufacturers, U.S. Department of Defense (DOD), aerospace contractors, enterprises, governments and research facilities. We supply solutions to customers who demand reliable “carrier class” products and engineering expertise in a variety of applications, including network synchronization, timing, frequency generation and distribution, testing, management, verification and/or the measurement of a time and frequency-based signal. We design and manufacture timing solutions for the U.S. aerospace industry, precision references for global communications, telecom synchronization management systems, secure GPS time for the U.S. government, rubidium clocks, cesium clocks and network timeservers.

Our products include synchronization network elements, and timing elements wireline, cable and wireless networks as well as the provision of professional services. Our products play an essential role in network reliability, and quality of service for wireline, cable and wireless communication networks, enabling our customers to increase performance, minimize service interruptions and provide seamless voice, video and data services efficiently in their network infrastructure.

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 our acquisitions of TrueTime and Datum, we have entered into the government, defense and commercial enterprise sectors.

Critical Accounting Policies, Significant Judgments and Estimates

Our condensed 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, stock options 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, 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 allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development based on their estimated fair values. We engage 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; 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.

Revenue Recognition

We assess collectibility based on the credit worthiness 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

Our standard warranty agreement is one year from shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. 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. The income from extended warranty contracts is recognized ratably over the period of contract.

Allowance for Doubtful Accounts

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

Inventory Valuation

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 reserved for at 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 reserves may be required. If the inventory value is reserved for at 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.

Accounting for Income Taxes

The determination of our tax provision is subject to judgments and estimates due to operations outside the United States, primarily in Puerto Rico. Net earnings of our Puerto Rico subsidiary are taxed in part 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 will affect our future tax rate.

The carrying value of our net deferred tax assets, which is made up of tax deductions, net operating loss carryforwards and tax credits, assumes we will be able to generate sufficient future income to fully realize these 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 their realization. If these tax credits are realized, the benefit will be credited to common stock.

Valuation of Goodwill

We perform goodwill impairment tests in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill Impairment, 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 is performed to measure the amount of impairment loss, if any. In fiscal 2005, no impairment losses were recorded based on these evaluations.

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 2005, no impairment losses were recorded based on these evaluations.

Stock-Based Compensation

We adopted Statement of Financial Accounting Standard (SFAS) No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model.. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS No. 123(R). Because we adopted SFAS No. 123(R), we no longer have employee stock awards subject to variable accounting treatment.

The adoption of SFAS No. 123(R) resulted in an expense of $1.3 million in the first quarter of fiscal 2006, which includes the net cumulative impact of 5% estimated future forfeitures in the determination of the period expense, rather than recording forfeitures when they occur as previously permitted. At September 30, 2005, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was approximately $7.7 million, net of estimated forfeitures of $1.0 million. This cost will be amortized on an accelerated method basis over a period of approximately 3 years and will be adjusted for subsequent changes in estimated forfeitures.

Results of Operations

The following table presents selected items in our condensed consolidated statements of operations as a percentage of total revenues for the three-months ended September 30, 2005 and 2004.

	Three Months Ended September 30,
	2005		2004
Net revenue
Telecom Solutions Division:
Wireline Products	44.5	%	44.5	%
Wireless/OEM Products	13.0	%	18.2	%
Global Services	6.0	%	4.5	%
Specialty Manufacturing/Other	3.9	%	6.2	%
Timing, Test and Measurement Division	32.6	%	26.6	%
Total net revenue	100.0	%	100.0	%

Cost of products and services	51.1	%	53.2	%
Amortization of purchased technology	2.5	%	1.9	%
Integration and restructuring charges	0.3	%	—	%
Gross profit	46.1	%	44.9	%
Operating expenses:
Research and development	9.7	%	7.9	%
Selling, general and administrative	32.7	%	25.4	%
Amortization of intangibles	0.4	%	0.3	%
Income from operations	3.4	%	11.2	%
Interest income	3.5	%	0.3	%
Interest expense	(2.8	)%	(0.3	)%
Income before income taxes	4.1	%	11.3	%
Income tax provision	1.0	%	2.6	%
Net Income	3.1	%	8.6	%

Net Revenue:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Net revenue (in thousands):
Wireline Products	$	19,682		$	23,141		(14.9	)%
Wireless/OEM Products	5,765			9,448			(39.0	)
Global Services	2,650			2,354			12.6
Specialty Manufacturing/Other	1,722			3,210			(46.4	)
Timing, Test and Measurement Division	14,448			13,805			4.7
Total Net Revenue	$	44,267		$	51,958		(14.8	)%
Percentage of Revenue	100.0		%	100.0		%

Net revenue consists of sales of products, software licenses and services. In the first quarter of fiscal 2006, net revenue decreased by $7.7 million to $44.3 million from $52.0 million in the corresponding quarter of fiscal 2005. The decrease in net revenue was attributable to the Wireline products decrease of $3.5 million or 14.9% (primarily due to a large project from one of our major customers during the first quarter of fiscal 2005), the Wireless/OEM products decrease of $3.7 million or 39.0% (due to reported softness in the wireless industry and a product shift toward lower priced, lower performance quartz-based products from higher performance, lower maintenance rubidium-based solutions) and the Specialty Manufacturing/Other segment decrease of $1.5 million or 46.4% (due to overall decreases in the electronics industry). These revenue decreases were partially offset by a $0.6 million or 4.7% increase in the Timing, Test and Measurement segment (due to growth in military-related purchases of our timing and frequency solutions for mobile communication applications) and the Global Services segment revenue increase of $0.3 million or 12.6% (primarily due to an increase in total solution sales to customers).

Cost of Product and Services:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Cost of products and services (in thousands):
Wireline Products	$	8,382		$	10,641		(21.2	)%
Wireless/OEM Products	4,277			6,543			(34.6	)
Global Services	1,530			1,235			23.9
Specialty Manufacturing/Other	1,468			2,661			(44.8	)
Timing, Test and Measurement Division	6,978			6,569			6.2
Other cost of sales	1,241			991			25.2
Total Cost	$23,876			$28,640			(16.6	)%
Percentage of Revenue	53.9		%	55.1		%

The cost of products and services, including other cost of sales, decreased by $4.8 million or 16.6% during the first quarter of fiscal 2006 compared with the same quarter of fiscal 2005. The cost of products and services for Wireline products decreased by $2.3 million or 21.2%, which was higher than the revenue decrease of 14.9%. The decrease in Wireline product costs was due to a continued shift towards sales of lower cost, higher margin products. The cost of products and services for Wireless/OEM products decreased by $2.3 million or 34.6%, which was lower than the revenue decrease of 39.0% due to increased costs and lower selling prices. The cost of products and services for Global Services products increased by $0.3 million or 23.9%, which was lower than the revenue increase of 12.6%, due to favorable sales mix of higher revenue in the lower cost services. The cost of products and services for Specialty Manufacturing/Other products decreased by $1.2 million or 44.8%, due to lower sales volume and was consistent with the revenue decrease of 46.4%. The cost of products and services for Timing, Test and Measurement products increased by $0.4 million or 6.2%, due to increased sales volume and was consistent with the revenue increase of 4.7%.

Included in other cost of sales is amortization of purchased technology, which was $124,000 higher during the first quarter of fiscal 2006 than the first quarter of fiscal 2005 due to additional intangibles obtained in the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. Also included in other cost of sales is $126,000 for integration and restructuring charges related to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line.

Per the adoption of SFAS No. 123(R), the cost of products and services included $153,000 for stock-based compensation expense in the first quarter of fiscal 2006.

Gross Profit:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Gross profit (in thousands):
Wireline Products	$	11,301		$	12,500		(9.6	)%
Wireless/OEM Products	1,488			2,905			(48.8	)
Global Services	1,120			1,119			0.1
Specialty Manufacturing/Other	254			549			(53.7	)
Timing, Test and Measurement Division	7,469			7,236			3.2
Other cost of sales	(1,241		)	(991		)	25.2
Total Gross Profit	$	20,391		$	23,318		(12.6	)%
Percentage of Revenue	46.1		%	44.9		%

Gross profit in the first quarter of fiscal 2006 decreased by $2.9 million or 12.6% compared to the corresponding quarter of fiscal 2005. This decrease was lower than the revenue decrease of 14.8%, due primarily to higher gross margin (as a percent of sales) in the Wireline segment, partially offset by higher other cost of sales related to the Agilent Technologies’ Frequency and Timing Standards product line. Gross profit for the Wireline products decreased by $1.2 million or 9.6%, which was lower than the 14.9% revenue decrease for the same period due to the shift towards sales of higher margin products. Gross profit for the Wireless/OEM products decreased by $1.4 million or 48.8%, which was higher than the revenue decrease of 39.0% due to lower selling prices. Gross profit for Global Services was flat compared with the same quarter of fiscal 2005, which was lower than the 12.6% revenue increase for the same period due to increased sales of higher cost services. Gross profit for the Specialty Manufacturing/Other products decreased by $0.3 million or 53.7%, which was higher than the revenue decrease of 46.4% for the same period due to higher manufacturing variances as a result of lower volume. Gross profit for the Timing, Test and Measurement products increased by $0.2 million or 3.2%, which was consistent with the revenue increase of 4.7% for the same period due to the growth in military-related purchases of our timing and frequency solutions for mobile communication applications. Other cost of sales for the first fiscal quarter of 2006 was higher in comparison to the first quarter of fiscal 2005 primarily due to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which includes costs associated with integration and restructuring and additional intangibles.

Operating Expenses

Research and Development Expense:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Research and development expense (in thousands)	$	4,275		$	4,129		3.5	%
Percentage of Revenue	9.7		%	7.9		%

Research and development expenses consist primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses were $4.3 million during the first quarter of fiscal 2006 compared to $4.1 million for the corresponding period of fiscal 2005. The overall increase in the research and development expense was primarily attributable to $121,000 in stock-based compensation.

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
	September 30,						Percentage
	2005			2004			Change
Selling, general and administrative including amortization of intangibles (in thousands)	$	14,625		$	13,346		9.6	%
Percentage of Revenue	33.0		%	25.7		%

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 by 9.6% to $14.6 million for the first quarter of fiscal 2006 compared to $13.3 million for the corresponding quarter of fiscal 2005. This $1.3 million increase in selling, general and administrative expenses was attributable primarily to an increase in stock-based compensation of $1.0 million and the hiring of new senior sales and marketing executives.

Interest Income:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Interest income (in thousands)	$	1,555		$	145		972.4	%
Percentage of Revenue	3.5		%	0.3		%

Interest income increased to $1.6 million during the first quarter of fiscal 2006 compared to $0.1 million during the corresponding quarter of fiscal 2005 due to a higher cash investments balance due primarily to the proceeds received from the convertible notes issued in June 2005 and higher average interest rates.

Interest Expense:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Interest expense (in thousands)	$	(1,238	)	$	(134	)	823.9	%
Percentage of Revenue	(2.8		)%	(0.3		)%

Interest expense consists primarily of interest on our convertible notes, bond payable and the capital lease for our headquarters building in San Jose, California. Interest expense increased to $1.2 million in the first quarter of fiscal 2006 compared to $0.1 million in the corresponding quarter of fiscal 2005 primarily due to interest expense on our convertible notes, which started accruing interest at the rate of 3.25% on June 15, 2005.

Income Taxes:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Income tax provision (in thousands).	$	435		$	1,369		(68.2	)%
Percentage of Revenue	1.0		%	2.6		%

Our income tax provision from continuing operations was $0.4 million in the first quarter of fiscal 2006, compared to a tax provision of $1.4 million in the corresponding quarter of fiscal 2005. Our effective tax rate in the first quarter of fiscal 2006 was 24.1%, compared to an effective tax rate of 23.4% in the corresponding quarter of fiscal 2005. Our effective tax rate is affected by the percentage of qualified Puerto Rico earnings compared to total earnings, as most of our Puerto Rico earnings are taxed under Section 936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from federal income taxes. This exemption is subject to wage-based and other limitations and expires at the end of fiscal 2006.

Net Income, as reported:

	Three Months Ended
	September 30,						Percentage
	2005			2004			Change
Net income, as reported (in thousands)	$	1,373		$	4,485		(69.4	)%
Percentage of Revenue	3.1		%	8.6		%

As a result of the factors discussed above, we had net income of $1.4 million, or $0.03 per share, in the first quarter of fiscal 2006 compared to net income of $4.5 million, or $0.10 per share, during the corresponding quarter of fiscal 2005.

Key Operating Metrics

Key operating metrics for measuring our performance include sales backlog, contract revenue, headcount and deferred revenue. A comparison of these metrics for the first quarter of fiscal 2006 and 2005 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 cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period. Our backlog amounted to $35.8 million as of September 30, 2005, compared to $31.0 million as of June 30, 2005. Our backlog, which is shippable within the next six months, was $25.4 million as of September 30, 2005, compared to $20.5 million as of June 30, 2005.

Contract Revenue:

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed-price and cost-plus reimbursement. Revenue is recognized under the fixed-price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance-based award fee. 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. As of September 30, 2005, we have approximately $4.5 million in contract revenue to be performed and recognized within the next 36 months, compared to approximately $4.7 million in contract revenue that was to be performed and recognized within the following 36 months as of June 30, 2005. These amounts have been accounted for as part of our sales backlog discussed above.

Headcount:

Our consolidated headcount as September 30, 2005 was comprised of 803 regular employees and 54 temporary employees, compared to 779 regular employees and 51 temporary employees as of June 30, 2005.

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 $0.4 million as of September 30, 2005, compared to $0.2 million as of June 30, 2005. Deferred revenue for maintenance contracts was $1.6 million as of September 30, 2005, compared to $1.4 million as of June 30, 2005. Deferred revenue for distributor return allowances was $0.2 million as of September 30, 2005, compared to $0.6 million as of June 30, 2005.

Liquidity and Capital Resources

As of September 30, 2005, working capital was $216.4 million compared to $223.1 million as of June 30, 2005. Cash and cash equivalents as of September 30, 2005 decreased to $84.1 million from $105.6 million as of June 30, 2005. This decrease was primarily the result of $2.8 million in cash provided by operating activities, $21.2 million in cash used for investing activities and $3.2 million in cash used for financing activities. Short-term investments increased from $89.5 million as of June 30, 2005 to $100.6 million as of September 30, 2005. This increase resulted primarily from an increase in short-term investments during fiscal 2006.

The $2.8 million net cash provided by operating activities in fiscal 2006 was primarily attributable to a net income of $1.4 million, non-cash expenses related to depreciation and amortization of $2.8 million, stock-based compensation expenses of $1.3 million and $0.6 million in stock option income tax benefits resulting from the adoption of SFAS No. 123(R). This was partially offset by a $1.5 million increase in accounts receivable and a $2.2 million decrease in accounts payable. The increase in accounts receivable was the result of a larger volume of quarter-end shipments, which were not collectible within the quarter. The decrease in accounts payable was primarily due to a lower volume of inventory purchases in the last month of the quarter compared to the prior quarter. The $21.2 million net cash used for investing activities in fiscal 2006 was primarily attributable to $14.1 million in purchases of short-term investments, $8.0 million in acquisition costs and $2.0 million in purchases of plant and equipment, which was partially offset by $3.0 million in maturities of short-term investments. The $3.2 million net cash used for financing activities was primarily attributable to $0.9 million in proceeds from the issuance of common stock, which was offset by $3.9 million attributable to repurchases of common stock and $0.3 million for the repayment of long-term obligations.

Our total capital spending commitments outstanding as of September 30, 2005 were $1.5 million. Days sales outstanding in accounts receivable was 63 days as of September 30, 2005, an increase from 58 days as of June 30, 2005. This increase is the result of a larger volume of quarter-end shipments, which were not collectible within the quarter.

We believe that our existing cash resources will be sufficient to meet our anticipated operating and working capital expenditure needs in the ordinary course of business for at least the next 12 months and the foreseeable future. We base our expense levels in part on our expectation of future revenue levels. If our revenue for a particular period is lower than we expect, we may take steps to reduce our operating expenses accordingly. If cash generated from operations is insufficient to satisfy our liquidity requirements or if we require additional capital resources to grow our business or to acquire complementary technologies and businesses in the future, we may seek to issue additional equity securities or obtain additional debt financing. Additional financing may not be available at all or on terms favorable to us. Additional financing may also be dilutive to our existing stockholders. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.

The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:

· Prior to June 15, 2023, if the common stock price for a least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the notes in effect on that 30th trading day;

· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;

· During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;

· If we have called the particular notes for redemption and the redemption has not yet occurred; or

· Upon the occurrence of specified corporate transactions.

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. On June 1, 2005 this agreement was amended to allow the Company to obtain a revolving line of credit up to $10.0 million to be used as working capital. The line of credit contains certain financial covenants and restrictions. The new line of credit expires on November 1, 2006. No borrowings were outstanding as of September 30, 2005.

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 establishes the interest rate for each rate period at the lowest rate that in its judgment would permit the sale of the bonds at par value. The bond is collateralized by the line of credit with Wells Fargo Bank described above. As of September 30, 2005, the bond balance was $2.5 million.

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections. SFAS No. 154 establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. Adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

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 first three-months ended September 30, 2005 or September 30, 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;

· frequent new product introductions; and

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

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 products needed to meet the synchronization at the edge of the network will probably be products sold at lower price points, with fewer features and may be sold through OEM and redistributor 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 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., Emrise Corp. and Oscilloquartz SA. Competitors in our wireless segment include Frequency Electronics, Inc. and Trimble Navigation, Ltd. In the enterprise network timing and frequency market, we compete primarily with Meinberg and EndRun Technologies. In the rubidium oscillators market, we compete primarily with Frequency Electronics, Inc., SRS 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 and frequency, 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 for our products;

· increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on the prices of, our products;

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

· our continued improvement of existing products;

· the timely development or acquisition of new or enhanced products;

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

· changes in worldwide market and economic conditions.

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

Our 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 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;

· although we have been approved as a supplier in requests for proposals from several major wireline customers, this does not guarantee any purchases;

· 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;

· increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on the prices of, our products;

· 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;

· our ability to establish in a timely fashion subsidiaries in new geographic regions, which our customers or potential customers may require to do business with us in those regions;

· 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 products which are internally manufactured to Quartz based products which are purchased and sold at a lower price point, which 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, 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 $1.4 million for the first quarter of fiscal 2006, we had net losses for two of the three preceding fiscal years. Future losses may create uncertainty about the recoverability of our $49.1 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 and frequency 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 and frequency 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.

Our critical business and manufacturing facilities in Puerto Rico and San Jose, California, as well as many our customers and suppliers, are located near known hurricane zones and earthquake fault zones and the occurrence of an earthquake, hurricane or other catastrophic disaster could cause damage to our facilities and equipment, which could require us, as well as our customers and suppliers, to cease, curtail or disrupt operations

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. In the event any necessary licenses are not available, we may not be able to sell or distribute our products, which may have a material adverse effect on our business.

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 the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, 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;

· we may incur substantial penalties if we do not relocate manufacturing operations as scheduled;

· 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 earnings per share 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.

Existing common stockholders may experience dilution in connection with our sale of convertible notes in June 2005 and will experience immediate dilution if we sell shares of our common stock or other equity securities in future financings, and, as a result, our stock price may go down

Our common stockholders may experience dilution in connection with the sale in June 2005 of $120 million worth of convertible notes if our stock price reaches $12.49 or more per share.

In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common stockholders will experience dilution.

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, labeling, discharge, disposal and human exposure to 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. We could also be subject to fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. 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. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes. 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.

A 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 an 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 owner’s claims and any related governmental action may expose us to material liability and could significantly harm our business.

Our operating results may be adversely affected as a result of our required compliance with European Union Directives on Waste Electrical and Electronic Equipment and the Restriction of the Use of Hazardous Substances in electrical and electronic equipment

In January 2003, the European Union enacted Directive 2002/96/EC on Waste Electrical and Electronic Equipment Directive, known as the WEEE Directive. The WEEE Directive requires producers of certain electrical and electronic equipment to be financially responsible for the future disposal costs of this equipment. Some of our products fall within the scope of this Directive and as such we will incur some financial responsibility for the collection, recycling, treatment and disposal of both new product sold, and product already sold prior to the WEEE Directive’s enforcement date, to customers within the European Union.

At the same time, the European Union also enacted Directive 2002/95/EC on the Restriction of the use of Hazardous Substances in electrical and electronic equipment, known as the RoHS Directive. This Directive restricts the use of certain hazardous substances, including mercury, lead, cadmium, hexavalent chromium and certain flame retardants, used in the construction of component parts of electrical and electronic equipment. We may need to change our manufacturing processes, redesign or reformulate some of our products, and change some components to eliminate these hazardous substances in our products, in order to be able to continue to offer them for sale within the European Union.

Individual European Union member states are required to transpose the Directives into national legislation. Although not all European Union member states have enacted legislation to implement these two directives, we continue to review the applicability and impact of both directives on the sale of our products within the European Union. If we fail to comply with these laws, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties. We may incur increased manufacturing costs, and some products may be subject to production delays to comply with future legislation which implements these directives, but we cannot currently estimate the extent of such increased costs or production delays, if any. However, to the extent that any such cost increases or delays are substantial, our operating results could be materially adversely affected. In addition, we are aware of similar legislation, which may be enacted in other countries, such as Japan and China, and possible new federal and state legislation in the United States, the cumulative impact of which could significantly increase our operating costs and adversely affect our operating results.

We are subject to other significant governmental regulations relating to health and safety, packaging, product content and labor regulations

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, Asia and Canada, accounted for 31% of net revenue during the first quarter of fiscal year 2006, compared to 36% of net revenue during corresponding quarter of fiscal 2005. 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;

· 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 September 30, 2005, we had recorded goodwill with a net book value of $52.9 million related to acquisitions of Datum and TrueTime and Agilent Technologies’ Frequency and Timing Standards product line and of Hewlett Packard Company’s Communication Synchronization Business. We test for impairment at least annually and whenever evidence of impairment exists. We performed our annual goodwill impairment test as of June 30, 2005 and determined that goodwill was not impaired.

Increases in our effective tax rate may negatively impact our net earnings

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. The Section 936 exemption is subject to a variety of limitations before it expires at the end of fiscal 2006. Historically, we have reduced our effective tax rate using the Section 936 exemption. Our effective tax rate will increase in fiscal 2006 as forecasted qualified Puerto Rican earnings are expected to exceed the applicable Section 936 limitations. Additionally, the effective tax rate may fluctuate quarterly, depending on the percentage of quarterly Puerto Rican earnings to total earnings and changes to forecasts of full year Puerto Rican earnings and total earnings. An increase in our effective tax rate will increase our federal income taxes, negatively impact our net earnings and may 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 and our cost 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 required by Section 404 of the Sarbanes-Oxley Act of 2002

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year beginning June 30, 2005, and to include a management report assessing the

effectiveness of our internal controls over financial reporting in all annual reports beginning with our annual report on Form 10-K for the year ended June 30, 2005. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting.

Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of June 30, 2005, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Exposure

As of September 30, 2005, we had short-term investments of $100.6 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 in as much 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 September 30, 2005, 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.

On June 8, 2005, we issued convertible subordinate notes with a fixed rate of 3.25%, which would have no interest rate risk impact to 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 $0.7 million with the United Kingdom and $0.1 million with Germany at September 30, 2005, 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

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In late 1996, Datum (which we acquired in October 2002) received notice of potential environmental contamination from the owner of 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 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. As of September 30, 2005, we currently have an accrual of $0.7 million for remediation costs, appraisal fees and other ongoing monitoring costs.

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

a) Not applicable.

b) Not applicable.

c) The following table provides monthly detail regarding our share repurchases and forfeitures during the three-months ended September 30, 2005:

Period	Total Number of Shares Purchased	Average Price per Share		Total Number of Shares Forfeited

August 1, 2005 through August 31, 2005	283,550	$	8.61
September 1, 2005 through September 30, 2005	163,500	8.62		18,000
Total	447,050	$	8.62	18,000

As of September 30, 2005, the total number of shares available for repurchase was 2,112,577.

During the first quarter of fiscal 2006, we repurchased 447,050 shares pursuant to the repurchase program for an aggregate price of approximately $3.9 million.

Upon termination of a senior management person during the first quarter of fiscal 2006, 18,000 shares of restricted stock were forfeited pursuant to an existing agreement with that person.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.


PART I.	FINANCIAL INFORMATION

		Item1.	Financial Statements:

			Condensed Consolidated Balance Sheets—September 30, 2005 and June 30, 2005

			Condensed Consolidated Statements of Operations—Three months ended September 30, 2005 and 2004

			Condensed Consolidated Statements of Cash Flows—Three months ended September 30, 2005 and 2004

			Notes to Condensed Consolidated Financial Statements

		Item2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

		Item3.	Quantitative and Qualitative Disclosures About Market Risk

		Item4.	Controls and Procedures

PART II.	OTHER INFORMATION

		Item1.	Legal Proceedings

		Item2.	Unregistered Sales of Equity Securities and Use of Proceeds

		Item3.	Defaults Upon Senior Securities

		Item4.	Submission of Matters to a Vote of Security Holders

		Item5.	Other Information

		Item6.	Exhibits

		SIGNATURES

Exhibit Number		Description of Exhibits

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

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

	SYMMETRICOM, INC.
	(Registrant)

DATE: November 8, 2005	By:	/s/ THOMAS W. STEIPP
		Thomas W. Steipp
		Chief Executive Officer (Principal Executive Officer) and Director

DATE: November 8, 2005	By:	/s/ WILLIAM SLATER
		William Slater
		Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

Exhibit Number		Index of Exhibits

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

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

DATE: November 8, 2005	By:	/s/ THOMAS W. STEIPP
		Thomas W. Steipp
		Chief Executive Officer

		/s/ THOMAS W. STEIPP
		Thomas W. Steipp Chief Executive Officer and Director

		/s/ WILLIAM SLATER
		William Slater Chief Financial Officer and Secretary

Delaware

Note 1. Basis of Presentation

Note 2. Acquisition

Note 3. Summary of Significant Accounting Policies

Fiscal Period

Revenue Recognition

Use of Estimates

Stock-Based Compensation

Effect of Adoption of SFAS No. 123(R)

Stock Option Plans

For three-months ended September 30, 2004:

Note 4. Integration and restructuring charges

Note 5. New Accounting Pronouncements

Note 6. Net Earnings Per Share

Note 7. Inventories

Long-lived Assets Including Other Intangible Assets Subject to Amortization

Note 9. Comprehensive Income (Loss)

Note 10. Stock Repurchase Program

Note 11. Long-term Obligations

Note 12. Contingencies

Note 13. Business Segment Information

Note 14. Warranties

Overview

Critical Accounting Policies, Significant Judgments and Estimates

Business Combinations

Revenue Recognition

Warranty

Allowance for Doubtful Accounts

Inventory Valuation

Accounting for Income Taxes

Valuation of Goodwill

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

Results of Operations

Net Revenue:

Cost of Product and Services:

Gross Profit:

Operating Expenses

Research and Development Expense:

Selling, General and Administrative, Including Amortization of Intangible Assets:

Interest Income:

Interest Expense:

Income Taxes:

Net Income, as reported:

Key Operating Metrics

Sales Backlog:

Contract Revenue:

Headcount:

Deferred Revenue:

Liquidity and Capital Resources

· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;

· If we have called the particular notes for redemption and the redemption has not yet occurred; or

· Upon the occurrence of specified corporate transactions.

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

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

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

· rapidly changing technology;

· evolving industry standards;

· changes in end-user requirements;

· frequent new product introductions; and

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

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

· 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 for our products;

· increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on the prices of, our products;

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

· our continued improvement of existing products;

· the timely development or acquisition of new or enhanced products;

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

· changes in worldwide market and economic conditions.

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

· 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 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;

· although we have been approved as a supplier in requests for proposals from several major wireline customers, this does not guarantee any purchases;

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