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 March 31, 2006

OR

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer 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 April 30, 2006
Common Stock		45,951,507

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SYMMETRICOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)
(Unaudited)

	March 31,		June 30,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	132,605	$	105,635
Short-term investments	55,105		89,514
Cash and investments	187,710		195,149
Accounts receivable, net of allowance for doubtful accounts of $933 as of March 2006 and $874 as of June 2005	32,260		29,049
Inventories	29,751		26,698
Prepaids and other current assets	10,040		10,827
Total current assets	259,761		261,723
Property, plant and equipment, net	25,654		23,063
Goodwill	45,899		49,248
Other intangible assets, net	9,089		10,272
Deferred taxes and other assets	48,952		47,365
Note receivable from employee	500		500
Total assets	$	389,855	$	392,171

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,195	$	12,684
Accrued compensation	10,056		9,062
Accrued warranty	3,569		3,338
Other accrued liabilities	13,136		12,416
Current maturities of long-term obligations	1,241		1,110
Total current liabilities	40,197		38,610
Long-term obligations	125,997		126,967
Deferred income taxes	419		419
Total liabilities	166,613		165,996

Stockholders’ equity:
Common stock, $0.0001 par value; 70,000 shares authorized, 47,583 shares issued and 45,926 shares outstanding as of March 2006; 47,076 shares issued and 46,329 shares outstanding as of June 2005	182,380		184,292
Accumulated other comprehensive income	238		100
Retained earnings	40,624		41,783
Total stockholders’ equity	223,242		226,175
Total liabilities and stockholders’ equity	$	389,855	$	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						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
Net revenue	$	45,538		$	43,815		$	137,714		$	143,737
Cost of products and services	25,168			22,085			72,822			73,849
Amortization of purchased technology	774			971			2,849			2,932
Integration and restructuring charges	426			—			769			—
Impairment of purchased technology	1,198			—			1,198			—
Gross profit	17,972			20,759			60,076			66,956
Operating expenses:
Research and development	4,886			4,057			13,739			11,990
Selling, general and administrative	13,739			13,126			42,077			38,864
Amortization of intangibles	117			135			404			444
Impairment of goodwill	6,963			—			6,963			—
Income (loss) from operations	(7,733		)	3,441			(3,107		)	15,658
Interest income	1,983			388			5,294			755
Interest expense	(1,252		)	(127		)	(3,744		)	(392		)
Income (loss) before income taxes	(7,002		)	3,702			(1,557		)	16,021
Income tax (benefit) provision	(1,815		)	883			(398		)	4,134
Income (loss) from continuing operations	(5,187		)	2,819			(1,159		)	11,887
Gain from discontinued operations, net of tax	—			—			—			162
Net income (loss)	$	(5,187	)	$	2,819		$	(1,159	)	$	12,049

Earnings (loss) per share—basic:
Net earnings (loss) from continuing operations	$	(0.11	)	$	0.06		$	(0.03	)	$	0.27
Gain from discontinued operations	—			—			—			—
Net earnings (loss)	$	(0.11	)	$	0.06		$	(0.03	)	$	0.27

Weighted average shares outstanding—basic	46,003			45,868			46,088			45,328

Earnings (loss) per share—diluted:
Net earnings (loss) from continuing operations	$	(0.11	)	$	0.06		$	(0.03	)	$	0.26
Gain from discontinued operations	—			—			—			—
Net earnings (loss)	$	(0.11	)	$	0.06		$	(0.03	)	$	0.26

Weighted average shares outstanding—diluted	46,003			47,125			46,088			46,709

See notes to the condensed consolidated financial statements.

SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

	Nine Months Ended
	March 31,
	2006				2005
Cash flows from operating activities:
Net income (loss)	$	(1,159		)	$	11,887
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment of goodwill and intangible assets	8,161				—
Amortization of deferred stock-based compensation	—				719
Gain from discontinued operations	—				162
Depreciation and amortization	7,805				7,979
Loss (gain) on disposal of property, plant and equipment	177				(11		)
Stock-based compensation	3,656				856
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable	(3,211			)	216
Inventories	(1,696			)	2,714
Prepaids and other current assets	1,182				448
Accounts payable	(489			)	(5,252		)
Accrued compensation	969				(731		)
Accrued warranty	(211			)	221
Other accrued liabilities	675				(441		)
Deferred income taxes	(1,815			)	(963		)
Stock option income tax benefit	592				2,405
Net cash provided by operating activities	14,636				20,209

Cash flows from investing activities:
Purchases of short-term investments	(25,647			)	(19,470		)
Maturities of short-term investments	60,086				7,398
Proceeds from sale of Austin building	—				1,566
Purchases of property, plant and equipment	(7,238			)	(1,871		)
Acquisition and related cost, net of cash acquired	(8,032			)	—
Net cash provided by (used for) investing activities	19,169				(12,377		)

Cash flows from financing activities:
Repayment of long-term obligations	(794			)	(76		)
Proceeds from issuance of common stock	1,592				6,525
Proceeds from repayment of employee note	—				555
Repurchase of common stock	(7,752			)	(810		)
Net cash (used for) provided by financing activities	(6,954			)	6,194
Effect of exchange rate changes on cash and cash equivalents	119				50

Net increase in cash and cash equivalents	26,970				14,076
Cash and cash equivalents at beginning of period	105,635				34,213
Cash and cash equivalents at end of period	$	132,605			$	48,289

Non-cash investing and financing activities:
Unrealized gain on securities, net of income taxes	$	19			$	128
Cash payments for:
Interest	$		2,844		$	392
Income taxes	961				1,013

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 and nine months ended March 31, 2006 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending June 30, 2006.

The condensed 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 oscillators, cesium clocks 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 does not expect significant revisions to the purchase price allocations for the acquired businesses.

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 April 2, 2006 and April 3, 2005.

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 products 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 $1.4 million as of March 31, 2006, of which $1.0 million is expected to be billed in fiscal 2006 and the remainder in subsequent years.

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 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 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, 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.

SFAS No. 123(R) resulted in stock-based compensation expense of $1.3 million in the third quarter of fiscal 2006 and $3.7 million for the nine-month period ended March 31, 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 March 31, 2006, the total compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans but not yet recognized was approximately $4.9 million, net of estimated forfeitures of $0.6 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 was no excess tax benefits resulting from the exercise of stock-based compensation deductions reported for financial reporting purposes in the nine months ended March 31, 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 to be classified in the same expense line items as cash compensation. This compensation appears in cost of good sold, operating expenses.

Effect of Adoption of SFAS No. 123(R)

The application of SFAS No. 123(R) had the following effect on the reported amounts for the three and nine months ended March 31, 2006 relative to amounts that would have been reported using the intrinsic value method under previous accounting (in thousands, except per share amounts):

	Three Months Ended									Nine Months Ended
	March 31, 2006									March 31, 2006
	Using Intrinsic			SFAS 123R			As			Using Intrinsic		SFAS 123R			As
	Value Method			Adjustments			Reported			Value Method		Adjustments			Reported

Income (loss) from operations	$	(6,424	)	$	(1,309	)	$	(7,733	)	$	549	$	(3,656	)	$	(3,107	)
Income (loss) before income taxes	(5,693		)	(1,309		)	(7,002		)	2,099		(3,656		)	(1,557		)
Net Income (loss)	(4,363		)	(824		)	(5,187		)	1,144		(2,303		)	(1,159		)

Basic earnings per share
Earnings (loss)	(0.09		)	(0.02		)	(0.11		)	0.02		(0.05		)	(0.03		)

Diluted earnings per share
Earnings (loss)	(0.09		)	(0.02		)	(0.11		)	0.02		(0.05		)	(0.03		)

The weighted average estimated fair value of options granted was $3.89 per share in the third quarter of fiscal 2006 and $6.12 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 three months and nine months ended March 31, 2006 and 2005, as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005

Expected life (in years) after vesting	0.9		2.6		0.9		2.5
Risk-free interest rate	4.7	%	4.2	%	4.4	%	3.7	%
Volatility	58.65	%	77.30	%	57.17	%	79.27	%

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 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 several equity benefit plans under which employees, directors and consultants may be granted non-qualified and incentive options to purchase shares of Symmetricom’s common stock and restricted stock. One of these plans 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 or a pro rata share based on the time served by a new director in the previous calendar year. All options have been granted at the fair market value of our common stock on the date of grant and, except with respect to grants made with the changes described below, 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 under the employee stock option plans. In addition, effective December 28, 2005, the Symmetricom Board approved a change in the terms for stock options granted on and after December 28, 2005 under the director stock option plan. These amendments provide that the life of a stock option made under these plans is now 5 years instead of 10 years. Vesting terms are generally unchanged. With the grant of options to our non-employee directors in January 2006, the shares in the director stock option plan was depleted. For the three months ended March 31, 2006, the Company granted options to purchase 104,075 shares of its common stock, and awarded 35,000 shares of restricted stock. 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 $1.6 million from the exercise of common stock options during the nine months ended March 31, 2006.

			Options Outstanding
	Shares				Weighted
	Available		Number of		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
Granted	(1	)	1		6.86
Exercised	—		(48	)	4.20
Canceled	26		(26	)	8.48
Expired	(1	)	—		—
Balances at December 31, 2005	1,547		4,406		$	7.06
Granted	(104	)	104		8.93
Granted - restricted shares	(35	)	—		—
Exercised	—		(105	)	4.53
Canceled	3		(3	)	8.13
Expired	3		(3	)	9.63
Balances at March 31, 2006	1,414		4,399		$	7.17

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 March 31, 2006:

	Options Outstanding						Options Exercisable
		Weighted
		Average	Average
		Remaining	Weighted		Aggregate			Weighted		Aggregate
Range of	Number of	Contractual	Average		Intrinsic		Number of	Average		Intrinsic
Exercise Prices	Shares	Life	Exercise Price		Value		Shares	Exercise Price		Value
	(In thousands)	(In years)			(In thousands)		(In thousands)			(In thousands)
$ 2.52 — $ 4.29	334	3.07	$	3.62	$	1,646	326	$	3.61	$	1,608
$ 4.33 — $ 4.33	488	6.18	4.33		2,058		488	4.33		2,058
$ 4.36 — $ 5.02	483	3.35	4.79		1,819		434	4.83		1,617
$ 5.08 — $ 7.08	394	3.80	5.72		1,114		385	5.71		1,095
$ 7.25 — $ 7.25	693	8.35	7.25		901		166	7.25		216
$ 7.29 — $ 8.55	404	5.35	7.77		315		290	7.71		245
In the money subtotal	2,796	5.40	5.74		7,853		2,089	5.28		6,839
$ 8.70 — $ 9.42	631	4.98	9.29		—		80	9.19		—
$ 9.46 — $ 9.63	183	6.92	9.53		—		85	9.50		—
$ 9.75 — $ 9.75	672	8.01	9.75		—		163	9.75		—
$ 9.77 — $ 14.81	117	7.55	11.23		—		38	12.45		—
$ 2.52 — $ 14.81	4,399	5.86	$	7.17	$	7,853	2,455	$	5.96	$	6,839

The aggregate intrinsic value in the preceding table represents the total pre-tax value of stock options outstanding as of March 31, 2006, based on the Company’s common stock closing price of $8.55 on March 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date.

The total number of shares of common stock subject to in-the-money options outstanding and exercisable as of March 31, 2006 was 2,088,815.

		Weighted
		Average	Average
		Remaining	Weighted		3/31/2006		Intrinsic		Aggregate
	Number of	Contractual	Average		Closing		Value		Intrinsic
Option	Shares	Life	Exercise Price		Price		Per Share		Value
	(In thousands)	(In years)							(In thousands)
Outstanding at March 31, 2006	2,796	5.40	$	5.74	$	8.55	$	2.81	$	7,853

Exercisable at March 31, 2006	2,089	4.55	$	5.28	$	8.55	$	3.27	$	6,839

There were 2,361,169 shares of common stock subject to in-the-money options exercisable as of June 30, 2005, based on the Company’s closing stock price of $10.37 at the end of the fiscal period ended June 30, 2005.

For three months and nine months ended March 31, 2005:

Stock-based compensation in the third quarter of fiscal 2005 was determined using the intrinsic value method. The following table provides supplemental information for the three months and nine months ended March 31, 2005 as if stock-based compensation had been computed under SFAS No. 123(R) (in thousands, except per share data):

	Three Months Ended			Nine Months Ended
	March 31,			March 31,
	2005			2005
	(in thousands, except for earnings per share)

Net income, as reported	$	2,819		$	12,049
Add: Stock-based employee compensation expense with respect to restricted stock awards included in reported net earnings, net of related tax effects	56			445
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(1,446		)	(4,836		)
Pro forma	$	1,429		$	7,658

Earnings per share—basic :
As reported	$	0.06		$	0.27
Pro forma	$	0.03		$	0.17
Earnings per share— diluted:
As reported	$	0.06		$	0.26
Pro forma	$	0.03		$	0.16

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. SFAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. An entity shall follow either the transition guidance for the additional paid-in capital pool (APIC pool) in paragraph 81 of Statement 123(R) or the alternative transition method described in the FASB Staff Position (FSP). Paragraph 81 of SFAS 123(R) indicates that for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of Statement 123(R), an entity shall include the net excess tax benefits that would have qualified as such had the entity adopted SFAS 123(R) for recognition purposes. The FSP provided an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The FSP includes simplified methods to establish the beginning balance of the l APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

The Company is reviewing the two methods, and will elect the method that is most appropriate to its facts and circumstances by November 10, 2006.

Note 4. Discontinued Operations

In June 2003, we discontinued the operation of the Trusted Time Division as part of our post-acquisition consolidation process. The division was acquired as part of the acquisition of Datum in October 2002. The division has been accounted for as a discontinued operation and, accordingly, the results of operations have been excluded from continuing operations in the consolidated statements of operations. During the nine months ended March 31, 2005, we recognized a gain for discontinued operations of $0.2 million net of taxes, for a final payment on a buy-out of a royalty obligation from a licensor of Trusted Time technology. During the current quarter, we did not recognize any gain or loss for discontinuing operations.

Note 5. Integration and Restructuring Charges

During fiscal 2005, we did not have any integration and restructuring charges. In the first nine months of fiscal 2006, we recorded integration charges of a total of $0.8 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 quarters.

The following tables show the details of the restructuring cost accruals, which consist of facilities and severance costs, for the nine-month period ended March 31, 2006 and the 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 charges (fiscal 2004)	700		—		—			700
Total	$	3,667	$	—	$	(2,021	)	$	1,646

	Balance at							Balance at
	June 30,		Expense					March 31,
	2005		Additions		Payments			2006
	(in thousands)
Facilities (October 2002 to June 2003)	$	544	$	—	$	(502	)	$	42
Facilities (fiscal 2004)	402		—		(112		)	290
Total facilities	946		—		(614		)	332
All other integration and restructuring charges (fiscal 2004)	700		—		(85		)	615
All other integration and restructuring charges (fiscal 2006)	—		769		(769		)	—
Total	$	1,646	$	769	$	(1,468	)	$	947

The accrued balance of the $0.3 million lease loss accrual for the facilities as of March 31, 2006 will be paid over the next six years.

Note 6. New Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. SFAS No. 156 amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this Statement. Adoption of SFAS No. 156 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Adoption of SFAS No. 155 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2005, FASB issued 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 7. 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 antidilutive.

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
	(In thousands, except per share						(In thousands, except per share
	amounts)						amounts)
Numerator:
Income (loss) from continuing operations	$	(5,187	)	$	2,819		$	(1,159	)	$	11,887
Gain from discontinued operations	—			—			—			162
Net Income	$	(5,187	)	$	2,819		$	(1,159	)	$	12,049

Shares (Denominator):
Weighted average common shares outstanding	46,003			45,935			46,088			45,395
Weighted average common shares outstanding subject to repurchase	—			(67		)	—			(67		)
Weighted average shares outstanding—basic	46,003			45,868			46,088			45,328
Weighted average dilutive share equivalents from stock options and warrants	—			1,190			—			1,314
Weighted average common shares dilutive subject to repurchase	—			67			—			67
Weighted average shares outstanding—diluted	46,003			47,125			46,088			46,709
Net (loss) earnings per share - basic	$	(0.11	)	$	0.06		$	(0.03	)	$	0.27
Net (loss) earnings per share - diluted	$	(0.11	)	$	0.06		$	(0.03	)	$	0.26

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

	Three Months Ended		Nine Months Ended
	March 31,		March 31,
	2006	2005	2006	2005
	(In thousands, except per share		(In thousands, except per share
	amounts)		amounts)

Stock options & warrants	4,438	1,963	4,779	1,874
Common shares subject to repurchase	35	—	182	—
Total shares of common stock excluded from diluted net earnings per share calculation	4,473	1,963	4,961	1,874

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 subordinated 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 subordinated notes were included in our diluted earnings per share as of March 31,

2006. See Note 12 to our condensed consolidated financial statements for a description of our contingent convertible subordinated notes.

Note 8. Inventories

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

	March 31,		June 30,
	2006		2005
	(in thousands)
Raw materials	$	14,566	$	12,207
Work-in-process	9,702		9,089
Finished goods	5,483		5,402

	$	29,751	$	26,698

Note 9. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the nine months ended March 31, 2006 are as follows for the different segments of Symmetricom (see Note 2):

						Timing, Test
						and
	Wireline		Wireless/OEM			Measurement		Total
	(in thousands)
Balances as of June 30, 2005	$	27,917	$	6,963		$	14,368	$	49,248
Addition (see Note 2)	—		—			3,614		3,614
Impairment	—		(6,963		)	—		(6,963		)

Balances as of March 31, 2006	$	27,917	$	—		$	17,982	$	45,899

In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of approximately $7.0 million for the write-down of the goodwill related to our Wireless/OEM business segment purchase in connection with the Datum acquisition in October 2002. The impairment charge reflects changing business conditions in the wireless segment surrounding product pricing, gross margins, new product acceptance and the increasingly prevalent use of wireless technologies that do not require a frequency reference at the cell site, but receive the required synchronization references from central office. Our accounting policy is to perform impairment tests in accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill Impairment, on an annual basis and between annual tests in certain circumstances for each reporting unit using a discounted cash flow valuation method. During the third quarter of fiscal 2006, we decided to perform a Goodwill Impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we do not anticipate any improvement. For the same period during fiscal year 2005, there were no charges associated with the 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, and 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 most recent annual goodwill impairment test as of June 2005 and no impairment losses were recorded based on these evaluations. An internal evaluation identified the need to record an impairment loss for the Wireless/OEM segment in the third quarter of fiscal 2006 using a discounted cash flow valuation method.

Long-lived Assets Including Other Intangible Assets Subject to Amortization

In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of approximately $1.2 million for the write-down of the other intangibles related to our Wireless/OEM business segment purchase in connection with the Datum acquisition in October 2002. During the third quarter of fiscal 2006, we decided to perform an Intangible Impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we do not anticipate any improvement. For the same period during fiscal year 2005, there were no charges associated with the intangible assets.

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 March 31, 2006 and June 30, 2005 consist of:

	Gross								Net
	Carrying				Accumulated				Intangible
	Amount		Acquisition		Amortization		Impairment		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	$	22,660	$	3,354	$	16,873	$	1,198	$	7,943
Customer lists, trademarks, other	3,973		—		2,827		—		1,146

Total as of March 31, 2006	$	26,633	$	3,354	$	19,700	$	1,198	$	9,089

The estimated future amortization expenses are as follows:

Fiscal year:	(in thousands)

2006 (remaining three months)	$	888
2007	2,323
2008	1,427
2009	1,294
2010	1,011
2011	796
Thereafter	1,350

Total amortization	$	9,089

Intangible asset amortization expense for the nine months ended March 31, 2006 and 2005 was approximately $3.3 million and $3.4 million, respectively.

Increases in the other intangible assets for the nine months ended March 31, 2006 primarily resulted from the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which included $2.6 million in purchased technology, $0.2 million in backlog and $0.5 million in customer relationships. The $0.2 million in backlog was fully amortized in the first quarter of fiscal 2006.

Note 10. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of two components: net income (loss) and other comprehensive income. Other comprehensive income 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 income. Other comprehensive income 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						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Net income (loss)	$	(5,187	)	$	2,819		$	(1,159	)	$	12,049
Other comprehensive income:
Foreign currency translation adjustments	41			(42		)	119			50
Unrealized gain (loss) on investments, net of taxes	(26		)	144			19			128

Other comprehensive income	15			102			138			178

Total comprehensive income (loss)	$	(5,172	)	$	2,921		$	(1,021	)	$	12,227

Note 11. 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 45.9 million shares of Symmetricom common stock outstanding as of March 31, 2006.

During the first nine months of fiscal 2006, we repurchased 910,573 shares of common stock pursuant to the repurchase program for an aggregate price of approximately $7.8 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 three quarters of fiscal 2006:

	Total			Total
	Number of	Average		Number of
	Shares	Price Paid		Shares
Period	Purchased	per Share		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
November 1, 2005 through November 30, 2005	240,000	8.01		—
February 1, 2006 through February 28, 2006	68,000	9.13		—
March 1, 2006 through March 31, 2006	155,523	8.62		—

Total	910,573	$	8.60	18,000

As of March 31, 2006, the total number of shares available for repurchase under the repurchase program was 1,649,054 shares.

Note 12. Long-term Obligations

On November 18, 2005, we entered into a First Amendment to Lease, effective as of October 27, 2005, which amends that certain Lease dated June 10, 1996 between the Company and Nexus Equity II LLC, as successor in interest to Nexus Equity, Inc., for approximately 117,739 square feet of space in an office building located in San Jose, California. The leased space serves as our principal executive office.

The amendment extends the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that,

commencing December 1, 2005, basic annual rent (as defined in the lease) will be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with paragraph 14(b)(ii) of SFAS No. 13, Accounting for Leases.

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 30^th 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, which 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 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 March 31, 2006, the bond balance was $2.4 million.

Long-term obligations consist of:

	March 31,			June 30,
	2006			2005
	(In thousands)
Long-term obligations:
Capital lease	$	4,193		$	4,953
Less—current maturities	(1,171		)	(1,040		)
Lease loss accrual	162			279
Straight-line rent accrual	86			—
Bond payable	2,440			2,475
Less—current maturities	(70		)	(70		)
Convertible subordinate notes	120,000			120,000
Post-retirement benefits, net	357			370
Total	$	125,997		$	126,967

Note 13. Contingencies

We formerly leased a tract of land in Texas for our operations. Those operations involved the use of solvents and, at the end of the lease, we remediate an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of participation in the Voluntary Cleanup Program. On May 20, 2004, the Company received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. Symmetricom has not yet been served in this matter. The Company is continuing to work on the remediation of the formerly leased site as well as the adjacent properties and intends to defend this lawsuit vigorously. As of March 31, 2006, we had an accrual of $0.6 million for remediation costs, appraisal fees and other ongoing monitoring costs.

Under the indemnification provisions of our standard sales contracts, we agree 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 14. Business Segment Information

Subsequent to the acquisitions of Datum and TrueTime (both of which we acquired in October 2002) and Agilent Technologies’ Frequency and Timing Standards product line (which we 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 include GoWide, a product that provides a high-bandwidth solution for medium-sized businesses without access to optical networks, was reported as a segment in prior periods and now is included in Wireless/OEM Products due to changes in the management reporting structure. Through our Global Services division, we offer a broad portfolio of services for our customers around the world. The services we offer include system planning, network audits, network monitoring, maintenance, logistics and installation. Transmission Products and Contract Manufacturing were reported as segments in prior periods, and are now included in Specialty Manufacturing/Other within the Telecom Solutions Division.

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

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
	(in thousands, except percentages)						(in thousands, except percentages)

Net revenue:
Telecom Solutions Division:
Wireline Products	$	19,029		$	18,341		$	57,736		$	62,162
Wireless/OEM Products	5,716			5,832			17,196			22,370
Global Services	3,444			2,534			9,276			7,513
Specialty Manufacturing/Other	4,006			2,381			8,356			7,613
Timing, Test and Measurement Division	13,343			14,727			45,150			44,079
Total net revenue	45,538			43,815			137,714			143,737
Cost of sales:
Telecom Solutions Division:
Wireline Products	8,539			7,671			25,122			27,154
Wireless/OEM Products	4,576			4,218			13,264			15,514
Global Services	1,376			1,337			4,562			4,260
Specialty Manufacturing/Other	3,140			1,909			6,779			6,236
Timing, Test and Measurement Division	7,538			6,950			23,096			20,685
Other cost of sales*	2,397			971			4,815			2,932
Total cost of sales	27,566			23,056			77,638			76,781
Gross profit:
Telecom Solutions Division:
Wireline Products	10,490			10,670			32,614			35,008
Wireless/OEM Products	1,140			1,614			3,932			6,856
Global Services	2,068			1,197			4,714			3,253
Specialty Manufacturing/Other	866			472			1,577			1,377
Timing, Test and Measurement Division	5,805			7,777			22,054			23,394
Other cost of sales*	(2,397		)	(971		)	(4,815		)	(2,932		)
Total gross profit	$	17,972		$	20,759		$	60,076		$	66,956

Gross margin:
Telecom Solutions Division:
Wireline Products	55.1		%	58.2		%	56.5		%	56.3		%
Wireless/OEM Products	19.9		%	27.7		%	22.9		%	30.6		%
Global Services	60.0		%	47.2		%	50.8		%	43.3		%
Specialty Manufacturing/Other	21.6		%	19.8		%	18.9		%	18.1		%
Timing, Test and Measurement Division	43.5		%	52.8		%	48.8		%	53.1		%
Other cost of sales*	(5.3		)%	(2.2		)%	(3.5		)%	(2.0		)%
Total gross margin	39.5		%	47.4		%	43.6		%	46.6		%

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

No customer accounted for 10% or more of our net revenue for the three months or nine months ended March 31, 2006 or 2005.

Note 15. 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 nine-month periods of fiscal 2006 and 2005 were as follows:

	Nine Months Ended
	March 31,
	2006			2005
	(In thousands)
Beginning balance	$	3,338		$	3,194
Provision for warranty for the year	1,741			1,391
Provision for warranty - acquisition of Agilent product line	442			—
Less: Actual warranty costs	(1,952		)	(1,170		)
Ending balance	$	3,569		$	3,415

Note 16. Line of Credit

We have a credit agreement with Wells Fargo Bank, National Association, which includes certain financial covenants and restrictions. We were not in compliance with one of the covenants under the agreement at the end of the third quarter of fiscal 2006 and the bank issued a waiver on May 1, 2006. This is the first time the bank issued this waiver and we do not anticipate any further need for a waiver in the future. The line of credit expires on November 1, 2006. No borrowings were outstanding as of March 31, 2006.

Note 17. Subsequent Event

At a meeting held on May 5, 2006, our Board of Directors approved certain changes to the compensation program for non-employee directors. After giving effect to the changes, each non-employee director will receive an annual retainer of $30,000, with the Chairman of the Board receiving an incremental $15,000, the Chairman of the Audit Committee receiving an incremental $10,000 and the Chairman of each of the Compensation Committee and the Governance Committee receiving an incremental $5,000, in each case effective July 1, 2006. With respect to committee meetings attended by non-employee committee members, the Board approved fees of $1,000 per meeting attended in person and $500 per meeting attended by telephone. No fees will be paid for Board meetings.

Effective January 1, 2007, each non-employee director will receive an annual non-statutory stock option grant to purchase 7,500 shares of our common stock and a grant of 2,500 shares of restricted stock, each with 100% vesting at the end of one year or upon the occurrence of a change of control. This automatic grant of options and restricted stock replaces the automatic annual grant of 10,000 options to purchase common stock that is currently in place for continuing non-employee directors.

On April 27, 2006, we announced plans for the closure of the contract manufacturing work conducted at our Puerto Rico facility. Symmetricom’s Telecom Solution Division revenues contain a Specialty Manufacturing/Other segment that is related to this contract manufacturing work. We anticipate exiting this non-core business during fiscal 2007 and reallocating the majority of the related manufacturing resources to other activities. Revenues for this segment were $9.8 million and $9.5 million for fiscal 2005 and 2004, respectively. Gross profit was $1.6 million and $1.4 million for fiscal 2005 and 2004, respectively.

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 to 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 oscillators, 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 products 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.

Covenants

We have a credit agreement with Wells Fargo Bank, National Association, which includes certain financial covenants and restrictions. We were not in compliance with one of covenants under the agreement at the end of the third quarter of fiscal 2006 and the bank issued a waiver on May 1, 2006. This is the first time the bank issued this waiver and we do not anticipate or any further need for a waiver in the future. The line of credit expires on November 1, 2006. No borrowings were outstanding as of March 31, 2006. The line of credit with Wells Fargo Bank is further described below in “ Management’s Discussions and Analysis of Financial Condition and Result of Operation Liquidity and Capital Resources.”

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.

We are reviewing tax-planning strategies for fiscal 2007 and beyond in order to address the consequences of the expiration of Section 936 at the end of fiscal 2006. Without the benefit of Section 936, our effective tax rate is estimated to be between 35% and 38% for fiscal 2007. However, we are currently reviewing tax-planning strategies for fiscal 2007 and beyond in order to address the consequences of the expiration of Section 936 at the end of fiscal 2006.

The carrying value of our net deferred tax assets, which is made up of tax deductions, net operating loss carry forwards 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 will 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

In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of $7.0 million for the write-down of the goodwill entirely related to our wireless business segment purchase in connection with the Datum acquisition in October 2002. For the same period of fiscal year 2005, there were no charges.

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. During the third quarter of fiscal 2006, we decided to perform a Goodwill Impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we do not anticipate any improvement. 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 using discounted cash flow valuation method, 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 year 2005, no impairment losses were recorded based on these evaluations.

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

In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of $1.2 million for the write-down of the other intangibles entirely related to our wireless business segment purchase in connection with the Datum acquisition in October 2002. For the same period of fiscal year 2005, there were no charges.

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. During the third quarter of fiscal 2006, we decided to perform an Intangible Impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we do not anticipate any improvement. 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. We test for impairment at least annually and whenever evidence of impairment exists.

Stock-Based Compensation

On July 4, 2006, we adopted 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.

SFAS No. 123(R) resulted in stock-based compensation expense of $1.3 million in the third quarter of fiscal 2006 and $3.7

million for the nine-month period ended March 31, 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 March 31, 2006, the total compensation cost related to unvested stock-based awards granted to employees under our stock option plans but not yet recognized was approximately $4.9 million, net of estimated forfeitures of $0.6 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.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. SFAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. An entity shall follow either the transition guidance for the additional paid-in capital pool (APIC pool) in paragraph 81 of SFAS 123(R) or the alternative transition method described in the FASB Staff Position (FSP). Paragraph 81 of SFAS 123(R) indicates that for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R), an entity shall include the net excess tax benefits that would have qualified as such had the entity adopted SFAS 123 (R) for recognition purposes. The FSP provided an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The FSP includes simplified methods to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

We are reviewing the two methods and will elect the method that is most appropriate to our facts and circumstances by November 10, 2006.

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 and nine months ended March 31, 2006 and 2005:

	Three Months				Nine Months
	Ended				Ended
	March 31,				March 31,
	2006		2005		2006		2005

Net revenue
Telecom Solutions Division:
Wireline Products	41.8	%	41.9	%	41.9	%	43.2	%
Wireless/OEM Products	12.5	%	13.3	%	12.5	%	15.6	%
Global Services	7.6	%	5.8	%	6.7	%	5.2	%
Specialty Manufacturing/Other	8.8	%	5.4	%	6.1	%	5.3	%
Timing, Test and Measurement Division	29.3	%	33.6	%	32.8	%	30.7	%
Total net revenue	100.0	%	100.0	%	100.0	%	100.1	%

Cost of products and services	55.3	%	50.4	%	52.9	%	51.4	%
Amortization of purchased technology	1.7	%	2.2	%	2.1	%	2.0	%
Integration and restructuring charges	0.9	%	—	%	0.5	%	—	%
Impairment of purchased technology	2.6	%	—	%	0.9	%	—	%
Gross profit	39.5	%	47.4	%	43.6	%	46.6	%
Operating expenses:
Research and development	10.7	%	9.3	%	10.0	%	8.3	%
Selling, general and administrative	30.2	%	30.0	%	30.6	%	27.0	%
Amortization of intangibles	0.3	%	0.3	%	0.3	%	0.3	%
Impairment of goodwill	15.3	%	—	%	5.1	%	—	%
Income (loss) from operations	(17.0	)%	7.9	%	(2.3	)%	10.9	%
Interest income	4.4	%	0.9	%	3.8	%	0.5	%
Interest expense	(2.7	)%	(0.3	)%	(2.7	)%	(0.3	)%
Income (loss) before income taxes	(15.4	)%	8.4	%	(1.1	)%	11.1	%
Income tax provision (benefit)	(4.0	)%	2.0	%	(0.3	)%	2.9	%
Income (loss) from continuing operations	(11.4	)%	6.4	%	(0.8	)%	8.3	%
Gain from discontinued operations, net of tax	—	%	—	%	—	%	0.1	%
Net income (loss)	(11.4	)%	6.4	%	(0.8	)%	8.4	%

Net Revenue:

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change

Net revenue (in thousands) :
Wireline Products	$	19,029		$	18,341		3.8	%	$	57,736		$	62,162		(7.1	)%
Wireless/OEM Products	5,716			5,832			(2.0	)	17,196			22,370			(23.1	)
Global Services	3,444			2,534			35.9		9,276			7,513			23.5
Specialty Manufacturing/Other	4,006			2,381			68.2		8,356			7,613			9.8
Timing, Test and Measurement Division	13,343			14,727			(9.4	)	45,150			44,079			2.4
Total Net Revenue	$	45,538		$	43,815		3.9	%	$	137,714		$	143,737		(4.2	)%
Percentage of Revenue	100.0		%	100.0		%			100.0		%	100.0		%

Net revenue consists of sales of products, software licenses and services. In the third quarter of fiscal 2006, net revenue increased by $1.7 million to $45.5 million from $43.8 million in the corresponding quarter of fiscal 2005. The increase in net revenue was primarily attributable to the Specialty Manufacturing/Other products increase of $1.6 million or 68.2% (due to a volume increase for a major customer to transition future production to another manufacturer in fiscal 2007), the Global Services segment increase of $0.9 million or 35.9% (primarily due to an increase in customers purchasing services with their product purchase) and the Wireline products increase of $0.7 million or 3.8%. These revenue increases were partially offset by a $1.4 million or 9.4% decrease in the Timing, Test and Measurement segment (due to weakness in the Timing, Test & Measurement Division as a result of funding delays and scheduling changes for government programs) and a $0.1 million or 2.0% decrease in the Wireless/OEM segment.

In the first nine months of fiscal 2006, net revenue decreased by $6.0 million to $137.7 million from $143.7 million in the corresponding nine-month period of fiscal 2005. The decrease in net revenue was attributable to the Wireline products decrease of $4.4 million or 7.1% (primarily due to a large project from one of our major customers during the first nine months of fiscal 2005) and the Wireless/OEM products decrease of $5.2 million or 23.1% (due to reported softness in the wireless industry, a product shift toward lower priced, lower performance quartz-based products from higher performance, lower maintenance rubidium-based solutions and continued overall pricing pressure). These revenue decreases were partially offset by a $1.8 million or 23.5% increase in the Global Services segment (primarily due to an increase in total solution sales to customers), the Specialty Manufacturing/Other segment increase of $0.7 million or 9.8% (due to an increase for a major customer to transition future production to another manufacturer in fiscal 2007), and a $1.1 million or 2.4% 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).

Cost of Product and Services:

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change

Cost of products and services (in thousands) :
Wireline Products	$	8,539		$	7,671		11.3	%	$	25,122		$	27,154		(7.5	)%
Wireless/OEM Products	4,576			4,218			8.5		13,264			15,514			(14.5	)
Global Services	1,376			1,337			2.9		4,562			4,260			7.1
Specialty Manufacturing/Other	3,140			1,909			64.5		6,779			6,236			8.7
Timing, Test and Measurement Division	7,538			6,950			8.5		23,096			20,685			11.7
Other cost of sales	2,397			971			146.9		4,815			2,932			64.2
Total Cost	$	27,566		$	23,056		19.6	%	$	77,638		$	76,781		1.1	%
Percentage of Revenue	60.5		%	52.6		%			56.4		%	53.4		%

The cost of products and services, including other cost of sales, increased by $4.5 million or 19.6% for the third quarter of fiscal 2006 compared with the same quarter of fiscal 2005. The cost of products and services for Wireline products increased by $0.9 million or 11.3%, which was higher than the revenue increase of 3.8%, due primarily to higher manufacturing period costs. The cost of products and services for Wireless/OEM products increased by $0.4 million or 8.5%, despite revenue decrease of 2.0% due to increased costs. The cost of products and services for Global Services products increased by 2.9%, which was substantially lower than the revenue increase of 35.9%, due to favorable sales mix of higher revenue in the lower cost services. The cost of products and services for Specialty Manufacturing/Other products increased by $1.2 million or 64.5%, due to higher sales volume and was consistent with the revenue increase of 68.2%. The cost of products and services for Timing, Test and Measurement products increased by $0.6 million or 8.5%, associated with a revenue decrease of 9.4%, due primarily to an unfavorable product mix and higher manufacturing period costs, in addition to the delay of governmental funding programs.

Included in other cost of sales for the third quarter of fiscal 2006 are amortization of purchased technology, impairment of purchased technology and integration charges. There was an impairment charge of $1.2 million for purchased technology related to the Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. There was $0.4 million of integration and restructuring charges in the third quarter of fiscal 2006 related to the acquisition of Agilent Technologies’ Frequency

and Timing Standards product line, compared with no charge in the same quarter of fiscal 2005.

Per the adoption of SFAS No. 123(R), the cost of products and services included $0.2 million for stock-based compensation expense in the third quarter of fiscal 2006.

The cost of products and services, including other cost of sales, increased by $0.9 million or 1.1% during the first nine months of fiscal 2006 compared with the first nine months of fiscal 2005. The cost of products and services for Wireline products decreased by $2.0 million or 7.5%, which was fairly consistent with the revenue decrease of 7.1%. The cost of products and services for Wireless/OEM products decreased by $2.3 million or 14.5%, which was lower than the revenue decrease of 23.1% due to increased costs and lower selling prices. The cost of products and services for Global Services products increased by $0.3 million or 7.1%, which was lower than the revenue increase of 23.5%, due to favorable sales mix of higher revenue in the lower cost services. The cost of products and services for Specialty Manufacturing/Other products increased by $0.5 million or 8.7%, due to lower sales volume and was consistent with the revenue increase of 9.8%. The cost of products and services for Timing, Test and Measurement products increased by $2.4 million or 11.7% due to increased sales volume, but was higher than the revenue increase of 2.4% due to higher period costs and unfavorable product mix.

Included in other cost of sales for the first nine months of fiscal 2006 is the impairment charge of $1.2 million for purchased technology for the Wireless/OEM business segment. In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of $1.2 million for the write-down of the other intangibles principally related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. For fiscal 2005, there were no correspondent charges for this non-cash item. In addition, during the first nine months of fiscal2006, there were $0.8 million in integration and restructuring charges related to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. There were no integration expenses in the first nine months of fiscal 2005.

Per the adoption of SFAS No. 123(R), the cost of products and services included $0.4 million for stock-based compensation expense in the first nine months of fiscal 2006.

Gross Profit:

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change
Gross profit (in thousands) :
Wireline Products	$	10,490		$	10,670		(1.7	)%	$	32,614		$	35,008		(6.8	)%
Wireless/OEM Products	1,140			1,614			(29.4	)	3,932			6,856			(42.6	)
Global Services	2,068			1,197			72.8		4,714			3,253			44.9
Specialty Manufacturing/Other	866			472			83.5		1,577			1,377			14.5
Timing, Test and Measurement Division	5,805			7,777			(25.4	)	22,054			23,394			(5.7	)
Other cost of sales	(2,397		)	(971		)	146.9		(4,815		)	(2,932		)	64.2
Total Gross Profit	$	17,972		$	20,759		(13.4	)%	$	60,076		$	66,956		(10.3	)%
Percentage of Revenue	39.5		%	47.4		%			43.6		%	46.6		%

Gross profit in the third quarter of fiscal 2006 decreased by $2.8 million or 13.4% compared to the corresponding quarter of fiscal 2005 despite a revenue increase of 3.9%. Gross profit for Wireline products decreased by $0.2 million or 1.7%, which was lower than the 3.8% revenue increase for the same period due to higher manufacturing variance costs. Gross profit for the Wireless/OEM products decreased by $0.5 million or 29.4%, which was higher than the revenue decrease of 2.0% due to higher sales of low margin products and lower overall selling prices. Gross profit for Global Services increased by $0.9 million or 72.8%, which was higher than the 35.9% revenue increase for the same period due to increased sales of lower cost services. Gross profit for the Specialty Manufacturing/Other products increased by $0.4 million or 83.5%, which was higher than the revenue increase of 68.2% for the same period due to lower manufacturing costs on higher volume. Gross profit for the Timing, Test and Measurement products decreased by $2.0 million or 25.4%, which was lower than the revenue decrease of 9.4% for the same period due to the addition of the higher cost cesium product acquired from Agilent Technologies in August 2005. Other cost of sales for the third quarter of fiscal 2006 was higher in comparison to the third quarter of fiscal 2005 primarily due to the $1.2 million impairment charge for the write down of other intangibles principally related to our Wireless/OEM business segment and the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which includes costs associated with integration and restructuring and additional expense for amortization of intangibles.

Gross profit in the first nine months of fiscal 2006 decreased by $6.9 million or 10.3% compared with the first nine months of

fiscal 2005. This decrease in total gross profit was higher than the revenue decrease of 4.2%. Gross profit for the Wireline products decreased by $2.4 million or 6.8%, which was fairly consistent with the 7.1% revenue decrease for the same period. Gross profit for the Wireless/OEM products decreased by $2.9 million or 42.6%, which was higher than the revenue decrease of 23.1% due to lower selling prices and increased sales of lower margin products. Gross profit for Global Services increased by $1.5 million or 44.9%, which was higher than the 23.5% revenue increase for the same period due to increased sales of lower cost services. Gross profit for the Specialty Manufacturing/Other products increased by $0.2 million or 14.5%, which was higher than the revenue increase of 9.8% for the same period due to lower manufacturing costs as a result of higher volume. Gross profit for the Timing, Test and Measurement products decreased by $1.3 million or 5.7%, which was lower than the revenue increase of 2.4% for the same period due primarily to the addition of the higher cost cesium product acquired from Agilent Technologies in August 2005. Other cost of sales for the first nine months of fiscal 2006 was higher in comparison to the first nine months of fiscal 2005 primarily due to the $1.2 million impairment charge for the write down of other intangibles principally related to our Wireless/OEM business segment and 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								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change

Research and development expense (in thousands)	$	4,886		$	4,057		20.4	%	$	13,739		$	11,990		14.6	%
Percentage of Revenue	10.7		%	9.3		%			10.0		%	8.3		%

Research and development expenses were $4.8 million for the third 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 $0.1 million in stock-based compensation, salary increases and increased project spending to comply with the July 1, 2006 EU regulation (RoHS) banning hazardous material (discussed below).

Research and development expenses consist primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses were $13.7 million during the first nine months of fiscal 2006 compared to $12.0 million for the corresponding first nine months of fiscal 2005. The overall increase in the research and development expense was primarily attributable to $0.4 million in stock-based compensation, salary increases and increased spending in new R&D projects to comply with new EU regulation, RoHS (restriction of the use of certain hazardous substances in electrical and electronic equipment). This regulation will ban the placing in the EU market of new electrical and electronic equipment containing more than certain levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE) flame retardants beginning on July 1, 2006.

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								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change

Selling, general and administrative including amortization of intangibles (in thousands)	$	13,856		$	13,261		4.5	%	$	42,481		$	39,308		8.1	%
Percentage of Revenue	30.4		%	30.3		%			30.8		%	27.3		%

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 4.5% to $13.9 million for the third quarter of fiscal 2006 compared to $13.3 million for the corresponding quarter of fiscal 2005. This $0.6 million increase in selling, general and administrative expenses was attributable primarily to an increase in stock-based compensation of $1.0 million, annual merit increases and the benefits in prior year of $0.4 million for the collection of a previously written-off Datum receivable and $0.4 million for an adjustment for a reserve for a repayment of a collected receivable to a bankrupt customer.

These expenses increased by 8.1% to $42.5 million for the first nine months of fiscal 2006 compared to $39.3 million for the corresponding first nine months of fiscal 2005. This $3.2 million increase in selling, general and administrative expenses was

attributable primarily to an increase in stock-based compensation of $2.8 million, annual merit increases and the previously mentioned prior year benefit of $0.8 million for Datum receivable adjustments.

Impairment of goodwill:

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change

Impairment of goodwill (in thousands)	$	6,963		$	—			%	$	6,963		$	—			%
Percentage of Revenue	15.3		%	—		%			5.1		%	—		%

In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of $7.0 million for the write-down of goodwill principally related to our wireless business segment purchase in connection with the Datum acquisition in October 2002. For the fiscal year ended June 30, 2005, there were no charges associated with goodwill.

Interest Income:

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change
Interest income (in thousands)	$	1,983		$	388		411.1	%	$	5,294		$	755		601.2	%
Percentage of Revenue	4.4		%	0.9		%			3.8		%	0.5		%

Interest income increased to $2.0 million during the third quarter of fiscal 2006 compared to $0.4 million during the corresponding quarter of fiscal 2005 due to a higher cash investments balance primarily attributable to the proceeds received from the convertible notes issued in June 2005 and higher average interest rates.

Interest income increased to $5.3 million during the first nine months of fiscal 2006 compared to $0.8 million during the corresponding first nine months of fiscal 2005 due to a higher cash investments balance primarily attributable to the proceeds received from the convertible notes issued in June 2005 and higher average interest rates.

Interest Expense:

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change
Interest expense (in thousands)	$	(1,252	)	$	(127	)	885.8	%	$	(3,744	)	$	(392	)	855.1	%
Percentage of Revenue	(2.7		)%	(0.3		)%			(2.7		)%	(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 $1.3 million in the third 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.

Interest expense increased to $3.7 million in the first nine months of fiscal 2006 compared to $0.4 million in the corresponding first nine months 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								Nine Months Ended
	March 31,						Percentage		March 31,						Percentage
	2006			2005			Change		2006			2005			Change
Income tax provision (benefit) (in thousands)	$	(1,815	)	$	883		(305.5	)%	$	(398	)	$	4,134		(109.6	)%
Percentage of Revenue	(4.0		)%	2.0		%			(0.3		)%	2.9		%

Our income tax benefit from continuing operations was $ 1.8 million in the third quarter of fiscal 2006, compared to a provision of $ 0.9 million in the corresponding quarter of fiscal 2005. Our effective tax rate in the third quarter of fiscal 2006 was 26%, compared to an effective tax rate of 24% in the corresponding period of fiscal 2005. Our income tax benefit from continuing operations was $ 0.4 million in the first nine months of fiscal 2006, compared to a tax provision of $4.1 million in the corresponding first nine months of fiscal 2005. Our effective tax rate for the first nine months of fiscal 2006 was 25.6% compared to an effective tax rate of 25.8% in the corresponding first nine months of fiscal 2005.

Our effective tax rate (our income tax provision or benefit as a percentage of pre-tax income) 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 regular federal income tax. This exemption is subject to wage-based and other limitations and expires at the end of fiscal 2006. In the third quarter of fiscal 2006, the effective rate was also affected by the impairment of goodwill, a portion of which was non-deductible for tax, as well as the recognition of the benefit of certain tax credits, not previously recorded.

We are reviewing tax planning strategies for fiscal 2007 and beyond in order to address the consequences of the expiration of Section 936 at the end of fiscal 2006. Without the benefit of Section 936, our effective tax rate is estimated to be between 35% and 38% for fiscal 2007. However, we are currently reviewing tax-planning strategies for fiscal 2007 and beyond in order to address the consequences of the expiration of Section 936 at the end of fiscal 2006.

Gain from discontinued operations, net of tax:

	Three Months Ended									Nine Months Ended
	March 31,						Percentage			March 31,						Percentage
	2006			2005			Change			2006			2005			Change

Gain from discontinued operations (in thousands)	$	—		$	—		$	—	%	$	—		$	162		(100.0	)%
Percentage of Revenue			%	—		%	—		%	—		%	0.1		%

In June 2003, we discontinued the operation of the Trusted Time Division as part of our post-acquisition consolidation process. The division was acquired as part of the acquisition of Datum in October 2002. The division was accounted for as a discontinued operation and, accordingly, the results of operations were excluded from continuing operations in the consolidated statements of operations. During the third quarter of fiscal 2005, we recorded a gain of $0.2 million from our discontinued operations, which was attributable to the final payment arising from the sale of software. During the third quarter of fiscal 2006, we recorded no gain or loss from our discontinued operations.

During the first nine months of fiscal 2006, we recorded no gain or loss from our discontinued operations.

Net Income (loss):

	Three Months Ended								Nine Months Ended
	March 31,						Percentage		March 31,					Percentage
	2006			2005			Change		2006			2005		Change

Net income (loss) (in thousands)	$	(5,187	)	$	2,819		(284.0	)%	$	(1,159	)	$	12,049	(109.6	)%
Percentage of Revenue	(11.4		)%	6.4		%	(0.8	)%	8.4		%

As a result of the factors discussed above, we had net loss of $5.2 million, or $0.11 per share, in the third quarter of fiscal 2006 compared to net income of $2.8 million, or $0.06 per share, during the corresponding quarter of fiscal 2005, and we had net loss of $1.2 million, or $0.03 per share, in the first nine months of fiscal 2006 compared to net income of $12.0 million, or $0.27 per share, during the corresponding first nine months 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 third quarter of fiscal 2006 with the end of fiscal 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 $45.4 million as of March 31, 2006, compared to $31.0 million as of June 30, 2005. Our backlog, which is shippable within the next six months, was $27.8 million as of March 31, 2006, 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 March 31, 2006, we had approximately $5.8 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 of March 31, 2006 was comprised of 817 regular employees and 53 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 March 31, 2006, compared to $0.2 million as of June 30, 2005. Deferred revenue for maintenance contracts was $2.2 million as of March 31, 2006, compared to $1.4 million as of June 30, 2005. Deferred revenue for distributor return allowances was $0.3 million as of March 31, 2006, compared to $0.6 million as of June 30, 2005.

Liquidity and Capital Resources

As of March 31, 2006, working capital was $219.6 million compared to $223.1 million as of June 30, 2005. Cash and cash equivalents as of March 31, 2006 increased to $132.6 million from $105.6 million as of June 30, 2005. This increase was primarily the result of $14.6 million in cash provided by operating activities, $19.2 million in cash provided by investing activities and $7.0 million in cash used for financing activities. Short-term investments decreased from $89.5 million as of June 30, 2005 to $55.1 million as of March 31, 2006. This decrease resulted primarily from maturities in short-term investments during current quarter of fiscal 2006.

The $14.6 million net cash provided by operating activities in fiscal 2006 was primarily attributable to non-cash expenses related to depreciation and amortization of $7.8 million, non-cash expenses related to impairment of goodwill and intangibles of $8.2 million, stock-based compensation expenses of $3.7 million and stock option income tax benefits of $0.6 million resulting from the adoption of SFAS No. 123(R). This was partially offset by a net loss of $1.2 million, a $3.2 million decrease in accounts receivable, and a $1.8 million decrease of deferred income taxes resulting from tax benefits and an inventory decrease of $1.7. The $19.2 million net cash provided by investing activities in fiscal 2006 was primarily attributable to $25.6 million in purchases of short-term investments, $8.0 million in acquisition costs and $7.2 million in purchases of plant and equipment, which was partially offset by $60.1 million in maturities of short-term investments. The $7.0 million net cash used for financing activities was primarily attributable to $1.6 million in proceeds from the issuance of common stock, which was offset by $7.8 million attributable to repurchases of common stock and $0.8 million for the repayment of long-term obligations.

Our total capital spending commitments outstanding as of March 31, 2006 were $1.8 million. Day sales outstanding in accounts receivable was 64 days as of March 31, 2006, an increase from 58 days as of June 30, 2005. This increase is attributable to larger amount of shipments that were received in the last month of the quarter, which caused lower cash collection as compared to fiscal year 2005.

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 amendment extends the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that, commencing December 1, 2005, basic annual rent (as defined in the lease) will be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with paragraph 14(b)(ii) of SFAS No. 13, Accounting for Leases.

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 30^th 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 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.

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 repurchases from time to time through privately negotiated or open market transactions or other available means.

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 us 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. At the end of the third quarter of fiscal 2006, we were not in compliance with one of the covenants under the agreement, which requires us to reflect a net profit on a quarterly basis. Subsequently, the bank issued a waiver to the Company on May 1, 2006 covering this covenant for the third quarter. This is the first time the bank issued this waiver and we do not anticipated any further need for the waiver in the future. The line of credit expires on November 1, 2006. No borrowings were outstanding as of March 31, 2006.

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 March 31, 2006, the bond balance was $2.4 million.

Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. SFAS No. 156 amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this Statement. Adoption of SFAS No. 156 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Adoption of SFAS No. 155 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued 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

A relatively small number of customers have historically accounted for a significant portion of our net revenue, though no single customer accounted for 10% or more of our net revenue during the three-month and nine-month periods ended March 31, 2006 or March 31, 2005. 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 12% of our net annual 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.

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

We had a net loss of $5.2 million for the quarter ended March 31, 2006 as well as net losses for two of the three preceding fiscal years. We cannot assure you that we will regularly be able to achieve operating profitability. If we are unable to achieve operating profitability or if we incur future net losses and negative cash flow, our stock price may decline.

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 timely implement changes developed as a result of our process improvement projects without negatively impacting operations;

• 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 some or all of our deferred tax assets, which would significantly increase our tax expense and hurt our net earnings

We had net loss of $5.2 million for the third quarter of fiscal 2006 as well as net losses for two of the three preceding fiscal years. Future net losses may create substantial uncertainty about the realizeability of our $50.5 million net deferred tax assets. If we had to record a valuation allowance against our deferred tax assets, we would record an additional tax expense, which would reduce net earnings. In addition future uncertainties about the realizeability of our deferred tax assets would limit our ability to recognize future deferred tax assets on our balance sheet and correspondingly reduce net earnings. At the end of each quarter, 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.

Increases in our effective tax rate will 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 Rico earnings are taxed under Section 936 of the United States Internal Revenue Code, which exempts qualified Puerto Rican earnings from regular federal income 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 has increased in fiscal 2006 because forecasted qualified Puerto Rican earnings are expected to exceed the applicable Section 936 limitations. Additionally, the effective tax rate in fiscal 2006 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 negatively impacts our net earnings and may affect cash flow.

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 suppliers of components may be impacted by compliance with environmental regulations including RoHS & WEEE, which could affect our continued supply of components or cause additional costs for us to implement new components into our manufacturing process.

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. For example, it is possible that the factory could ship a product with an undetected defect because the test strategy did not test for such a condition. 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 of 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, the Restriction of the Use of Hazardous Substances in electrical and electronic equipment and any additional environmental requirements

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 products sold, and products 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 effective July 1, 2006. 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 or any additional environmental regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties. We are incurring and may continue to incur increased design, development and manufacturing costs, and some products may be subject to production delays to comply with future legislation which implements these Directives, but currently we cannot estimate the extent of such increased costs or production delays, if any. However, to the extent that any such cost increases or production delays are substantial, our revenue and 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 28% of net revenue during the third quarter of fiscal year 2006, compared to 35% of net revenue during the corresponding quarter of fiscal year 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;

• a global pandemic if it does not continue to be contained

• 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 and other intangible assets impairment charges in future quarters

As of March 31, 2006, we had recorded goodwill with a net book value of $45.9 million related to acquisitions of Datum and TrueTime and Agilent Technologies’ Frequency and Timing Standards product line. We test for impairment at least annually, and more frequently whenever evidence of impairment exists. We performed a goodwill impairment test on our Wireless/OEM business segment as of March 31, 2006 and determined that goodwill was impaired by approximately $7.0 million.

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 processes, and materials used in these processes. 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, cannot guarantee 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 March 31, 2006, we had short-term investments of $55.1 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 March 31, 2006, 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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We formerly leased a tract of land for our operations in Texas. Those operations involved the use of solvents and, at the end of the lease, we remediate an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of our participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. We have not yet been served in this matter. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties and intend to defend this lawsuit vigorously. As of March 31, 2006, we had an accrual of $0.6 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 nine months ended March 31, 2006:

	Total			Total
	Number of	Average		Number of
	Shares	Price Paid		Shares
Period	Purchased	per Share		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
November 1, 2005 through November 30, 2005	240,000	8.01		—
February 1, 2006 through February 28, 2006	68,000	9.13		—
March 1, 2006 through March 31, 2006	155,523	8.62		—

Total	910,573	$	8.60	18,000

As of March 31, 2006, the total number of shares available for repurchase was 1,649,054.

During the first nine months of fiscal 2006, we repurchased 910,573 shares of common stock pursuant to the repurchase program for an aggregate price of approximately $7.8 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.

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: May 09, 2006	By:	/s/ THOMAS W. STEIPP
		Thomas W. Steipp
		Chief Executive Officer (Principal Executive Officer) and Director

DATE: May 09, 2006	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: May 09, 2006	By:	/s/ THOMAS W. STEIPP
		Thomas W. Steipp
		Chief Executive Officer

DATE: May 09, 2006	By:	/s/ WILLIAM SLATER
		William Slater
		Chief Financial Officer

			Page

PART I.	FINANCIAL INFORMATION

	Item1.	Financial Statements:

		Condensed Consolidated Balance Sheets—March 31, 2006 and June 30, 2005	3

		Condensed Consolidated Statements of Operations—Three months and nine months ended March 31, 2006 and 2005	4

		Condensed Consolidated Statements of Cash Flows—Nine months ended March 31, 2006 and 2005	5

		Notes to Condensed Consolidated Financial Statements	6

	Item2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item3.	Quantitative and Qualitative Disclosures About Market Risk	39

	Item4.	Controls and Procedures	40

PART II.	OTHER INFORMATION

	Item1.	Legal Proceedings	41

	Item2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

	Item3.	Defaults Upon Senior Securities	41

	Item4.	Submission of Matters to a Vote of Security Holders	41

	Item5.	Other Information	42

	Item6.	Exhibits	42

	SIGNATURES		43

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

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