COMTECH TELECOMMUNICATIONS CORP /DE/ — Interim / Quarterly Report 2008

Dec 5, 2007

10-Q 1 d73123_10q.htm QUARTERLY REPORT

| UNITED
STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
| --- |
| FORM 10-Q |
| (Mark
One) |

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2007

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

| Commission File
Number: 0-7928 |
| --- |
| ● |
| (Exact
name of registrant as specified in its charter) |

	11-2139466
(State or other
jurisdiction of incorporation /organization)	(I.R.S. Employer
Identification Number)
68 South
Service Road, Suite 230, Melville, NY	11747
(Address of principal
executive offices)	(Zip Code)
(631)
962-7000
(Registrant’s telephone
number, including area code)

| 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. |
| --- |
| x Yes o No |
| 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. |
| Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o |
| Indicate by check mark
whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). |
| o Yes x No |

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 30, 2007, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 24,032,167 shares.

COMTECH TELECOMMUNICATIONS CORP. INDEX

| PART
I. | FINANCIAL
INFORMATION | Page |
| --- | --- | --- |
| Item
1. | Condensed Consolidated
Financial Statements | |
| Condensed Consolidated Balance Sheets - October 31, 2007 (Unaudited)
and July 31, 2007 | | 2 |
| Condensed Consolidated Statements of Operations - Three Months Ended
October 31, 2007 and 2006
(Unaudited) | | 3 |
| Condensed Consolidated Statements of Cash Flows - Three Months Ended
October 31, 2007 and 2006
(Unaudited) | | 4 |
| Notes to Condensed Consolidated Financial Statements | | 5 |
| Item
2. | Management’s
Discussion and Analysis of Financial Condition and Results of
Operations | 21 |
| Item
3. | Quantitative and
Qualitative Disclosures about Market Risk | 28 |
| Item
4. | Controls and
Procedures | 29 |
| PART
II. | OTHER
INFORMATION | |
| Item
1. | Legal
Proceedings | 29 |
| Item
1A. | Risk
Factors | 29 |
| Item
6. | Exhibits | 30 |
| Signature
Page | | 31 |

1

PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

Item 1.	October 31, 2007
	(Unaudited)
Assets
Current
assets:
Cash
and cash equivalents	$ 333,391,000		342,903,000
Accounts
receivable, net	89,517,000		73,585,000
Inventories,
net	71,685,000		61,987,000
Prepaid
expenses and other current assets	9,946,000		6,734,000
Deferred
tax asset – current	9,616,000		9,380,000
Total
current assets	514,155,000		494,589,000
Property,
plant and equipment, net	30,349,000		29,282,000
Goodwill	24,363,000		24,387,000
Intangibles
with finite lives, net	6,257,000		5,717,000
Deferred
financing costs, net	1,767,000		1,903,000
Other assets,
net	415,000		464,000
Total
assets	$ 577,306,000		556,342,000
Liabilities
and Stockholders’ Equity
Current
liabilities:
Accounts
payable	$ 27,928,000		26,137,000
Accrued
expenses and other current liabilities	40,141,000		47,332,000
Customer
advances and deposits	21,620,000		20,056,000
Current
installments of other obligations	137,000		135,000
Interest
payable	525,000		1,050,000
Income
taxes payable - current	3,862,000		2,796,000
Total
current liabilities	94,213,000		97,506,000
Convertible
senior notes	105,000,000		105,000,000
Other
obligations, less current installments	73,000		108,000
Income taxes
payable – non-current	2,854,000		—
Deferred tax
liability – non-current	8,184,000		7,960,000
Total
liabilities	210,324,000		210,574,000
Commitments
and contingencies (See Note 15)
Stockholders’
equity:
Preferred
stock, par value $.10 per share; shares authorized and unissued
2,000,000	—		—
Common
stock, par value $.10 per share; authorized 100,000,000 shares, issued 24,236,629 shares and
24,016,329 shares at October 31, 2007 and July 31, 2007,
respectively	2,424,000		2,402,000
Additional
paid-in capital	172,201,000		165,703,000
Retained
earnings	192,542,000		177,848,000
	367,167,000		345,953,000
Less:
Treasury
stock (210,937 shares)	(185,000	)	(185,000	)
Total
stockholders’ equity	366,982,000		345,768,000
Total
liabilities and stockholders’ equity	$ 577,306,000		556,342,000

See accompanying notes to condensed consolidated financial statements.

2

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

| | Three months
ended October 31, — 2007 | 2006 | | |
| --- | --- | --- | --- | --- |
| Net
sales | $ 115,055,000 | | 97,070,000 | |
| Cost of
sales | 64,577,000 | | 57,695,000 | |
| Gross
profit | 50,478,000 | | 39,375,000 | |
| Expenses: | | | | |
| Selling,
general and administrative | 20,399,000 | | 16,587,000 | |
| Research
and development | 11,041,000 | | 7,157,000 | |
| Amortization
of intangibles | 379,000 | | 649,000 | |
| | 31,819,000 | | 24,393,000 | |
| Operating
income | 18,659,000 | | 14,982,000 | |
| Other expenses
(income): | | | | |
| Interest
expense | 677,000 | | 695,000 | |
| Interest
income and other | (4,447,000 | ) | (3,175,000 | ) |
| Income before
provision for income taxes | 22,429,000 | | 17,462,000 | |
| Provision for
income taxes | 7,735,000 | | 6,635,000 | |
| Net
income | $ 14,694,000 | | 10,827,000 | |
| Net income per
share (See Note 4): | | | | |
| Basic | $ 0.61 | | 0.47 | |
| Diluted | $ 0.54 | | 0.41 | |
| Weighted
average number of common shares outstanding – basic | 23,924,000 | | 22,948,000 | |
| Weighted
average number of common and common equivalent shares outstanding assuming dilution –
diluted | 28,208,000 | | 27,389,000 | |

See accompanying notes to condensed consolidated financial statements.

3

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

| | Three months ended October
31, — 2007 | 2006 | | |
| --- | --- | --- | --- | --- |
| Cash flows from operating
activities: | | | | |
| Net
income | $ 14,694,000 | | 10,827,000 | |
| Adjustments
to reconcile net income to net cash used in operating activities: | | | | |
| Depreciation
and amortization of property, plant and equipment | 2,112,000 | | 1,768,000 | |
| Amortization
of intangible assets with finite lives | 379,000 | | 649,000 | |
| Amortization
of stock-based compensation | 2,719,000 | | 1,810,000 | |
| Amortization
of deferred financing costs | 136,000 | | 137,000 | |
| Gain
on disposal of property, plant and equipment | — | | (4,000 | ) |
| Provision
for allowance for doubtful accounts | 75,000 | | 27,000 | |
| Provision
for excess and obsolete inventory | 546,000 | | 550,000 | |
| Excess
income tax benefit from stock award exercises | (505,000 | ) | (295,000 | ) |
| Deferred
income tax (benefit) expense | (12,000 | ) | 460,000 | |
| Changes
in assets and liabilities, net of effects of acquisition: | | | | |
| Accounts
receivable | (16,007,000 | ) | 720,000 | |
| Inventories | (10,244,000 | ) | (11,235,000 | ) |
| Prepaid
expenses and other current assets | (4,013,000 | ) | 229,000 | |
| Other
assets | 49,000 | | 173,000 | |
| Accounts
payable | 1,866,000 | | (2,155,000 | ) |
| Accrued
expenses and other current liabilities | (6,991,000 | ) | (10,798,000 | ) |
| Customer
advances and deposits | 1,564,000 | | 2,849,000 | |
| Deferred
service revenue | — | | (2,536,000 | ) |
| Interest
payable | (525,000 | ) | (525,000 | ) |
| Income
taxes payable | 4,425,000 | | 3,720,000 | |
| Net
cash used in operating activities | (9,732,000 | ) | (3,629,000 | ) |
| Cash flows
from investing activities: | | | | |
| Purchases
of property, plant and equipment | (3,179,000 | ) | (2,773,000 | ) |
| Purchases
of other intangibles with finite lives | (193,000 | ) | — | |
| Payments
for business acquisition | (265,000 | ) | (2,191,000 | ) |
| Net
cash used in investing activities | (3,637,000 | ) | (4,964,000 | ) |
| Cash flows
from financing activities: | | | | |
| Principal
payments on other obligations | (33,000 | ) | (49,000 | ) |
| Excess
income tax benefit from stock award exercises | 505,000 | | 295,000 | |
| Proceeds
from exercises of stock options | 3,166,000 | | 2,140,000 | |
| Proceeds
from issuance of employee stock purchase plan shares | 219,000 | | 180,000 | |
| Net
cash provided by financing activities | 3,857,000 | | 2,566,000 | |
| Net decrease in
cash and cash equivalents | (9,512,000 | ) | (6,027,000 | ) |
| Cash and cash
equivalents at beginning of period | 342,903,000 | | 251,587,000 | |
| Cash and cash
equivalents at end of period | $ 333,391,000 | | 245,560,000 | |
| Supplemental cash flow
disclosures: | | | | |
| Cash paid
during the period for: | | | | |
| Interest | $ 1,063,000 | | 1,083,000 | |
| Income
taxes | $ 3,450,000 | | 2,455,000 | |
| Non cash
investing activities: | | | | |
| Accrued
business acquisition payments | $ — | | 1,036,000 | |

See accompanying notes to condensed consolidated financial statements.

4

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1)	General
	The accompanying
condensed consolidated financial statements of Comtech Telecommunications
Corp. and Subsidiaries (the “Company”) as of and for the three
months ended October 31, 2007 and 2006 are unaudited. In the opinion of
management, the information furnished reflects all material adjustments
(which include normal recurring adjustments) necessary for a fair
presentation of the results for the unaudited interim periods. The results
of operations for such periods are not necessarily indicative of the
results of operations to be expected for the full fiscal year. For the
three months ended October 31, 2007 and 2006, comprehensive income was
equal to net income.
	The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, and disclosure of contingent assets and liabilities, at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results may differ from those
estimates.
	These condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements of the Company for the fiscal
year ended July 31, 2007 and the notes thereto contained in the
Company’s Annual Report on Form 10-K, filed with the Securities and
Exchange Commission (“SEC”), and all of the Company’s
other filings with the SEC.
(2)	Reclassifications

Certain reclassifications have been made to previously reported financial statements to conform to the Company’s current financial statement format.

| (3) |
| --- |
| The Company applies the
provisions of Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”) No.
123(R), “Share-Based Payment,” which establishes the accounting
for employee stock-based awards. Under the provisions of SFAS No. 123(R),
stock-based compensation for both equity and liability-classified awards is
measured at the grant date, based on the calculated fair value of the
award, and is recognized as an expense over the requisite employee service
period (generally the vesting period of the grant). The fair value of
liability-classified awards is remeasured at the end of each reporting
period until the award is settled, with changes in fair value recognized
pro-rata for the portion of the requisite service period rendered. The
Company used the modified prospective method upon adopting SFAS No.
123(R). |
| The Company recognized
stock-based compensation for awards issued under the Company’s Stock
Option Plans and the Company’s 2001 Employee Stock Purchase Plan (the
“ESPP”) in the following line items in the Condensed
Consolidated Statements of Operations: |

| | Three months
ended October 31, — 2007 | 2006 | | |
| --- | --- | --- | --- | --- |
| Cost of
sales | $ 221,000 | | 140,000 | |
| Selling,
general and administrative expenses | 2,020,000 | | 1,421,000 | |
| Research and
development expenses | 478,000 | | 249,000 | |
| Stock-based
compensation expense before income tax benefit | 2,719,000 | | 1,810,000 | |
| Income tax
benefit | (941,000 | ) | (495,000 | ) |
| Net
stock-based compensation expense | $ 1,778,000 | | 1,315,000 | |

Of the total stock-based compensation expense before income tax benefit recognized in the three months ended October 31, 2007 and 2006, $51,000 and $42,000, respectively, relates to stock-based awards issued pursuant to the ESPP. Of the total stock-based compensation expense before income tax benefit recognized in the three months ended October 31, 2007, $89,000 related to awards of stock appreciation rights (“SARs”). There were no SARs outstanding at October 31, 2006. Stock-based compensation that was capitalized and included in ending inventory at both October 31, 2007 and July 31, 2007 was $106,000.

5

| The Company estimates
the fair value of stock-based awards using the Black-Scholes option pricing
model. The Black-Scholes option pricing model includes assumptions
regarding dividend yield, expected volatility, expected option term and
risk-free interest rates. The assumptions used in computing the fair value
of stock-based awards reflect the Company’s best estimates, but
involve uncertainties relating to market and other conditions, many of
which are outside of its control. Estimates of fair value are not intended
to predict actual future events or the value ultimately realized by the
employee who receives stock-based awards. |
| --- |
| The per share weighted
average grant-date fair value of stock-based awards granted during the
three months ended October 31, 2007 and 2006 was $15.73 and $10.58,
respectively. In addition to the exercise and grant-date prices of the
awards, certain weighted average assumptions that were used to estimate the
fair value of stock-based awards in the respective periods are listed in
the table below: |

	Three months ended October 31, — 2007	2006
Expected
dividend yield	0 %	0 %
Expected
volatility	43.11 %	45.47 %
Risk-free
interest rate	4.55 %	4.91 %
Expected life
(years)	3.55	3.63

| Stock-based awards
granted during the three months ended October 31, 2007 and 2006 have
exercise prices equal to the fair market value of the stock on the date of
grant, a contractual term of five years and a vesting period of three
years. All stock-based awards granted through July 31, 2005 had exercise
prices equal to the fair market value of the stock on the date of grant and
a contractual term of ten years and generally a vesting period of five
years. The Company settles employee stock option exercises with new shares.
All SARs granted through October 31, 2007 may only be settled with
cash. |
| --- |
| The Company estimates
expected volatility by considering the historical volatility of the
Company’s stock, the implied volatility of publicly traded stock
options in the Company’s stock and the Company’s expectations
of volatility for the expected term of stock-based compensation awards. The
risk-free interest rate is based on the United States (“U.S.”)
treasury yield curve in effect at the time of grant. The expected life is
the number of years that the Company estimates that options will be
outstanding prior to exercise. The expected life of the awards issued after
July 31, 2005 and through July 31, 2007 was determined using the
“simplified method” prescribed in SEC Staff Accounting
Bulletin (“SAB”) No. 107. Effective August 1, 2007, and in
accordance with SAB No. 107, the Company values awards based on the
expected life of the total award with the expected life determined by
employee groups with sufficiently distinct behavior patterns. |
| The following table
provides the components of the actual income tax benefit recognized for tax
deductions relating to the exercise of stock-based awards: |

	Three months ended October 31, — 2007		2006
Actual income tax benefit
recorded for the tax deductions relating to the
exercise of stock-based awards	$ 904,000		295,000
Less: Tax benefit initially
recognized on exercised stock-based awards vesting
subsequent to the adoption of SFAS No. 123(R)	(399,000	)	—
Excess income tax benefit
recorded as an increase to additional paid-in
capital	505,000		295,000
Less: Tax benefit initially
disclosed but not previously recognized on exercised
equity-classified stock-based awards vesting prior to the adoption
of SFAS No. 123(R)	—		—
Excess income tax benefit
from exercised equity-classified stock-based awards reported as a
cash flow from financing activities in the Company’s
Condensed Consolidated Statements of Cash Flows	$ 505,000		295,000

At October 31, 2007, total remaining unrecognized compensation cost related to unvested stock-based awards was $18,272,000, net of estimated forfeitures of $1,321,000. The net cost is expected to be recognized over a weighted average period of 2.1 years.

6

| (4) |
| --- |
| The Company calculates
earnings per share (“EPS”) in accordance with SFAS No. 128,
“Earnings per Share.” Basic EPS is computed based on the
weighted average number of shares outstanding. Diluted EPS reflects the
dilution from potential common stock issuable pursuant to the exercise of
stock-based awards and convertible senior notes, if dilutive, outstanding
during each period. Equity-classified stock-based awards to purchase
589,000 and 1,373,000 shares for the three months ended October 31, 2007
and 2006, respectively, were not included in the diluted EPS calculation
because their effect would have been anti-dilutive. |
| Liability-classified
stock-based awards do not impact, and are not included in, the denominator
for EPS calculations. |
| In accordance with
Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The
Effect of Contingently Convertible Instruments on Diluted Earnings per
Share,” the Company includes the impact of the assumed conversion of
its 2.0% convertible senior notes in calculating diluted EPS. |
| The following table
reconciles the numerators and denominators used in the basic and diluted
EPS calculations: |

| | Three months ended October
31, — 2007 | 2006 |
| --- | --- | --- |
| Numerator: | | |
| Net income
for basic calculation | $ 14,694,000 | 10,827,000 |
| Effect of
dilutive securities: | | |
| Interest
expense (net of tax) on convertible senior
notes | 416,000 | 416,000 |
| Numerator for
diluted calculation | $ 15,110,000 | 11,243,000 |
| Denominator: | | |
| Denominator
for basic calculation | 23,924,000 | 22,948,000 |
| Effect of
dilutive securities: | | |
| Stock
options | 951,000 | 1,108,000 |
| Conversion
of convertible senior notes | 3,333,000 | 3,333,000 |
| Denominator
for diluted calculation | 28,208,000 | 27,389,000 |

| (5) |
| --- |
| In August 2006, the
Company acquired certain assets and assumed certain liabilities of Insite
Consulting, Inc. (“Insite”), a logistics application software
company, for $3,203,000, including final transaction costs of $232,000. In
addition to the guaranteed purchase price, the Company might be required to
make certain earn-out payments based on the achievement of future sales
targets. The first part of the earn-out cannot exceed $1,350,000 and is
limited to a five-year period. The second part of the earn-out, which is
for a ten-year period, is unlimited and based on a per unit future sales
target primarily relating to new commercial satellite-based mobile data
communication markets. Insite has developed the geoOps™ Enterprise
Location Management System, a software-based solution that allows customers
to integrate legacy data systems with near-real time logistics and
operational data systems. Sales and income relating to the Insite assets
acquired would not have been material to the Company’s results of
operations for the three months ended October 31, 2006. This operation was
combined, in August 2006, with the Company’s existing business and is
part of the mobile data communications segment. |
| In February 2007, the
Company acquired certain assets and assumed certain liabilities of Digicast
Networks, Inc. (“Digicast”), a manufacturer of digital video
broadcasting equipment, for $1,000,000. Sales and income related to the
Digicast assets acquired would not have been material to the
Company’s results of operations for the three months ended October
31, 2006. This operation was combined, in February 2007, with the
Company’s existing business and is part of the telecommunications
transmission segment. |

7

The Company allocated the purchase price of these acquisitions as follows:

| Fair value of
net tangible assets acquired | Insite — $ 335,000 | 408,000 | Estimated Useful
Lives |
| --- | --- | --- | --- |
| Adjustments to
record intangible assets at fair value: | | | |
| Existing
technology | 447,000 | — | 7
years |
| Other
intangibles | 302,000 | 592,000 | 1 to 10
years |
| Goodwill | 2,119,000 | — | Indefinite |
| | 2,868,000 | 592,000 | |
| Aggregate
purchase price | $ 3,203,000 | 1,000,000 | |

| | The valuation of
existing technology was based primarily on the discounted capitalization of
royalty expense saved because the Company now owns the asset. The valuation
of other intangibles was primarily based on the value of the discounted
cash flows that the related assets could be expected to generate in the
future. |
| --- | --- |
| (6) | Accounts
Receivable |
| | Accounts
receivable consist of the following: |

| Amounts
receivable from the U.S. government and its agencies | October 31, 2007 — $ 48,436,000 | 38,773,000 |
| --- | --- | --- |
| Accounts
receivable from commercial customers | 36,286,000 | 33,859,000 |
| Unbilled
receivables on contracts-in-progress | 5,530,000 | 1,638,000 |
| | 90,252,000 | 74,270,000 |
| Less
allowance for doubtful accounts | 735,000 | 685,000 |
| Accounts
receivable, net | $ 89,517,000 | 73,585,000 |

| | Unbilled receivables on
contracts-in-progress include $5,141,000 and $1,308,000 at October 31, 2007
and July 31, 2007, respectively, due from the U.S. government and its
agencies. There was no retainage included in unbilled receivables at
October 31, 2007 or July 31, 2007. In the opinion of management,
substantially all of the unbilled balances will be billed and collected
within one year. |
| --- | --- |
| (7) | Inventories |
| | Inventories
consist of the following: |

| Raw materials
and components | October 31, 2007 — $ 38,727,000 | 32,669,000 |
| --- | --- | --- |
| Work-in-process
and finished goods | 41,145,000 | 37,822,000 |
| | 79,872,000 | 70,491,000 |
| Less reserve
for excess and obsolete inventories | 8,187,000 | 8,504,000 |
| Inventories,
net | $ 71,685,000 | 61,987,000 |

Inventories directly related to long-term contracts, including the Company’s Movement Tracking System (“MTS”) contract with the U.S. Army and our U.S. Army’s Force XXI Battle Command, Brigade and Below command and control systems (also known as Blue Force Tracking (“BFT”)) contracts with the U.S. government, were $21,271,000 and $6,547,000 at October 31, 2007 and July 31, 2007, respectively. Included in the inventory balance above at October 31, 2007 and July 31, 2007 is $1,285,000 and $2,286,000, respectively, related to a contract from a third party commercial customer to outsource its manufacturing.

8

(8)
Accrued
expenses and other current liabilities consist of the following:

| Accrued
warranty obligations | October 31, 2007 — $ 11,590,000 | 9,685,000 |
| --- | --- | --- |
| Accrued wages
and benefits | 9,910,000 | 20,657,000 |
| Accrued
commissions and royalties | 8,728,000 | 6,751,000 |
| Accrued
business acquisition payments | — | 290,000 |
| Other | 9,913,000 | 9,949,000 |
| Accrued
expenses and other current liabilities | $ 40,141,000 | 47,332,000 |

The Company provides warranty coverage for most of its products for a period of at least one year from the date of shipment. The Company records a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Some of the Company’s product warranties are provided under long-term contracts, the costs of which are incorporated into the Company’s estimates of total contract costs. Changes in the Company’s product warranty liability during the three months ended October 31, 2007 and 2006 were as follows:

| | Three months ended October
31, — 2007 | 2006 | | |
| --- | --- | --- | --- | --- |
| Balance at
beginning of period | $ 9,685,000 | | 10,468,000 | |
| Provision for
warranty obligations | 3,072,000 | | 1,282,000 | |
| Reversal of
warranty liability | (156,000 | ) | (517,000 | ) |
| Charges
incurred | (1,011,000 | ) | (1,754,000 | ) |
| Balance at end
of period | $ 11,590,000 | | 9,479,000 | |

| (9) |
| --- |
| On January 27, 2004,
the Company issued $105,000,000 of its 2.0% convertible senior notes in a
private offering pursuant to Rule 144A under the Securities Act of 1933, as
amended. The net proceeds from this transaction were $101,179,000 after
deducting the initial purchaser’s discount and other transaction
costs of $3,821,000. |
| The notes bear interest
at an annual rate of 2.0% and, during certain periods, the notes are
convertible into shares of the Company’s common stock at an initial
conversion price of $31.50 per share (a conversion rate of 31.7460 shares
per $1,000 original principal amount of notes), subject to adjustment in
certain circumstances. The notes may be converted if, during a conversion
period on each of at least 20 trading days, the closing sale price of the
Company’s common stock exceeds 120% of the conversion price in
effect. Upon conversion of the notes, in lieu of delivering common stock,
the Company may, in its discretion, deliver cash or a combination of cash
and common stock. The notes can be converted, at the option of the
noteholders, during the conversion period of September 17, 2007 through
December 14, 2007. On the basis of the closing sale prices of the
Company’s common stock through December 3, 2007, the Company also
anticipates that the notes will be convertible during the conversion period
of December 17, 2007 through March 14, 2008. Upon receiving notification of
a noteholder’s intent to convert, the Company, in accordance with the
provisions of the indenture, will inform the noteholder of its intention to
deliver shares of common stock or cash, or a combination thereof. The
Company may, at its option, redeem some or all of the notes on or after
February 4, 2009. Holders of the notes will have the right to require the
Company to repurchase some or all of the outstanding notes on February 1,
2011, February 1, 2014 and February 1, 2019 and upon certain events,
including a change in control. If not redeemed by the Company or repaid
pursuant to the holders’ right to require repurchase, the notes
mature on February 1, 2024. The notes have substantive conversion features
as defined by EITF No. 05-1, “Accounting for the Conversion of an
Instrument that Becomes Convertible Upon the Issuer’s Exercise of a
Call Option.” Accordingly, the Company will not recognize a gain or
loss if it issues common stock upon the conversion and settlement of these
notes. |

9

| The 2.0% interest is
payable in cash, semi-annually, through February 1, 2011. After such date,
the 2.0% interest will be accreted into the principal amount of the notes.
Also, commencing with the six-month period beginning February 1, 2009, if
the average note price for the applicable trading period equals 120% or
more of the accreted principal amount of such notes, the Company will pay
contingent interest at an annual rate of 0.25%. |
| --- |
| The notes are general
unsecured obligations of the Company, ranking equally in right of payment
with all of its other existing and future unsecured senior indebtedness and
senior in right of payment to any of its future subordinated indebtedness.
All of Comtech Telecommunications Corp.’s (the “Parent”)
wholly-owned subsidiaries have issued full and unconditional guarantees in
favor of the holders of the Company’s 2.0% convertible senior notes
(the “Guarantor Subsidiaries”), except for the subsidiary that
purchased Memotec, Inc. in fiscal 2004 (the “Non-Guarantor
Subsidiary”). These full and unconditional guarantees are joint and
several. Other than supporting the operations of its subsidiaries, the
Parent has no independent assets or operations and there are currently no
significant restrictions on its ability, or the ability of the guarantors,
to obtain funds from each other by dividend or loan. Consolidating
financial information regarding the Parent, the Guarantor Subsidiaries and
the Non-Guarantor Subsidiary can be found in Note 16 to the condensed
consolidated financial statements. |
| The net proceeds of the
offering are being used for working capital and general corporate purposes
and potentially may be used for future acquisitions of businesses or
technologies or repurchases of the Company’s common stock. The
Company filed a registration statement with the SEC, which has become
effective, for the resale of the notes and the shares of common stock
issuable upon conversion of the notes. |

| (10) |
| --- |
| Effective August 1,
2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109” (“FIN No. 48”). Except for
additional disclosures as noted below, there was no material impact on the
Company’s financial statements and the Company did not record any
cumulative-effect adjustment to the opening balance in retained earnings.
In accordance with FIN No. 48, there was no retrospective application to
any prior financial statement periods. |
| At August 1, 2007 (the
date of adoption of FIN No. 48) and October 31, 2007, the total
unrecognized tax benefits, excluding interest, was $3,955,000 and
$4,034,000, respectively, all of which would impact the Company’s
effective tax rate, if recognized. Unrecognized tax benefits result from
income tax positions taken or expected to be taken on the Company’s
income tax returns for which a tax benefit has not been recorded in the
Company’s financial statements. Of the total unrecognized tax
benefits, $2,801,000 and $2,854,000, respectively, were recorded as
non-current income taxes payable in the Condensed Consolidated Balance
Sheets of the Company. |
| The Company’s
policy is to recognize interest and penalties relating to uncertain tax
positions in income tax expense. At August 1, 2007 and October 31, 2007,
interest accrued relating to income taxes was $462,000 and $500,000,
respectively, net of the related income tax benefit. |
| The tax years that
remain open to examination by the U.S. Federal tax authorities are fiscal
2004 and forward. In addition, the Company is subject to tax in various
states and its Canadian subsidiary is subject to Canadian federal and
provincial taxes. In general, these tax returns are open for examination by
the applicable tax authorities for fiscal 2004 and forward. |

10

| (11) |
| --- |
| The Company
issues stock-based awards pursuant to the following plans: |
| 1993 Incentive Stock
Option Plan – The 1993 Incentive Stock Option Plan, as
amended, provided for the granting to key employees and officers of
incentive and non-qualified stock options to purchase up to 2,345,625
shares of the Company’s common stock at prices generally not less
than the fair market value at the date of grant with the exception of
anyone who, prior to the grant, owns more than 10% of the voting power, in
which case the exercise price cannot be less than 110% of the fair market
value. In addition, it provided formula grants to non-employee members of
the Company’s Board of Directors. The term of the options could be no
more than ten years. However, for incentive stock options granted to any
employee who, prior to the granting of the option, owns stock representing
more than 10% of the voting power, the option term could be no more than
five years. |
| As of October 31, 2007,
the Company had granted stock-based awards representing the right to
purchase an aggregate of 2,016,218 shares (net of 428,441 canceled awards)
at prices ranging between $0.67 - $5.31 per share, of which 145,800 are
outstanding at October 31, 2007. To date, 1,870,418 shares have been
exercised. Outstanding awards have been transferred to the 2000 Stock
Incentive Plan. The terms applicable to these awards prior to the transfer
continue to apply. The plan was terminated by the Company’s Board of
Directors in December 1999 due to the approval by the shareholders of the
2000 Stock Incentive Plan. |
| 2000 Stock Incentive
Plan – The 2000 Stock Incentive Plan, as amended, provides
for the granting to all employees and consultants of the Company (including
prospective employees and consultants) non-qualified stock options, SARs,
restricted stock, performance shares, performance units and other
stock-based awards. In addition, employees of the Company are eligible to
be granted incentive stock options. Non-employee directors of the Company
are eligible to receive non-discretionary grants of nonqualified stock
options subject to certain limitations. The aggregate number of shares of
common stock which may be issued may not exceed 5,737,500 plus the shares
that were transferred to the Plan relating to outstanding awards that were
previously granted, or available for grant, under the 1982 Incentive Stock
Option Plan and the 1993 Incentive Stock Option Plan. In September 2007,
the Board approved an amendment to the 2000 Stock Incentive Plan, subject
to stockholder approval on December 6, 2007, increasing the
number of shares of common stock subject to awards or with respect to which
awards may be granted by 850,000. The Stock Option Committee of the
Company’s Board of Directors, consistent with the terms of the Plan,
will determine the types of awards to be granted, the terms and conditions
of each award and the number of shares of common stock to be covered by
each award. Grants of incentive and non-qualified stock options may not
have a term exceeding ten years or no more than five years in the case of
an incentive stock option granted to a stockholder who owns stock
representing more than 10% of the voting power. |
| As of October 31, 2007,
the Company had granted stock-based awards representing the right to
purchase an aggregate of 5,423,435 shares (net of 575,865 canceled awards)
at prices ranging between $3.13 - $46.10, of which 2,700,973 are
outstanding at October 31, 2007. As of October 31, 2007, 2,722,462
stock-based awards have been exercised. All stock-based awards granted
through October 31, 2007 had exercise prices equal to the fair market value
of the stock on the date of grant. All stock-based awards granted through
July 31, 2005 have a term of ten years. All stock-based awards granted
since August 1, 2005 have a term of five years. |

11

The following table summarizes certain stock option plan activity during the three months ended October 31, 2007:

| Outstanding at
July 31, 2007 | 2,500,017 | $ | 21.67 | | Aggregate Intrinsic Value |
| --- | --- | --- | --- | --- | --- |
| Granted | 590,000 | | 42.58 | | |
| Expired/canceled | (28,450 | ) | 26.11 | | |
| Exercised | (214,794 | ) | 14.74 | | |
| Outstanding at
October 31, 2007 | 2,846,773 | $ | 26.49 | 4.32 | $ 79,040,000 |
| Exercisable at
October 31, 2007 | 817,948 | $ | 20.92 | 4.56 | $ 27,264,000 |
| Expected to vest at October 31,
2007 | 1,955,505 | $ | 28.67 | 4.20 | $ 50,022,000 |

| | Included in the number
of shares underlying stock-based awards outstanding at October 31, 2007, in
the above table, are 26,000 SARs with an aggregate intrinsic value of
$424,000. |
| --- | --- |
| | The total intrinsic
value of stock-based awards exercised during the three months ended October
31, 2007 and 2006 was $7,352,000 and $5,223,000, respectively. |
| | 2001 Employee Stock
Purchase Plan – The ESPP was approved by the shareholders
on December 12, 2000 and 675,000 shares of the Company’s common stock
were reserved for issuance. The ESPP is intended to provide eligible
employees of the Company the opportunity to acquire common stock in the
Company at 85% of fair market value at date of issuance through
participation in the payroll-deduction based ESPP. Through the first
quarter of fiscal 2008, the Company issued 266,093 shares of its common
stock to participating employees in connection with the ESPP. |
| (12) | Customer
and Geographic Information |
| | Sales by
geography and customer type, as a percentage of consolidated net sales, are as
follows: |

2007	2006
United
States
U.S.
government	60.6 %	56.3 %
Commercial
customers	8.8 %	14.3 %
Total
United States	69.4 %	70.6 %
International	30.6 %	29.4 %

International sales include sales to U.S. domestic companies for inclusion in products that will be sold to international customers. For the three months ended October 31, 2007 and 2006, except for sales to the U.S. government, no other customer represented more than 10% of consolidated net sales.

| (13) |
| --- |
| Reportable operating
segments are determined based on the Company’s management approach.
The management approach, as defined by SFAS No. 131, is based on the way
that the chief operating decision-maker organizes the segments within an
enterprise for making decisions about resources to be allocated and
assessing their performance. |

12

| While the
Company’s results of operations are primarily reviewed on a
consolidated basis, the chief operating decision-maker also manages the
enterprise in three operating segments: (i) telecommunications
transmission, (ii) mobile data communications and (iii) RF microwave
amplifiers. Telecommunications transmission products include satellite
earth station products (such as analog and digital modems, frequency
converters, power amplifiers, and voice gateways) and over-the-horizon
microwave communications products and systems. Mobile data communications
products include satellite-based mobile location, tracking and messaging
hardware and related services. RF microwave amplifier products include
solid-state, high-power, broadband amplifier products that use the
microwave and radio frequency spectrums. |
| --- |
| Unallocated expenses
result from such corporate expenses as legal, accounting and executive
compensation. In addition, for the three months ended October 31, 2007 and
2006, unallocated expenses include $2,719,000 and $1,810,000, respectively,
of stock-based compensation expense. Interest expense (which includes
amortization of deferred financing costs) associated with the
Company’s 2.0% convertible senior notes is not allocated to the
operating segments. Depreciation and amortization includes amortization of
stock-based compensation. Unallocated assets consist principally of cash,
deferred financing costs and deferred tax assets. Substantially all of the
Company’s long-lived assets are located in the U.S. |
| Corporate management
defines and reviews segment profitability based on the same allocation
methodology as presented in the segment data tables below. |

(in thousands)	Three months ended October 31, 2007 — Telecommunications Transmission	Mobile Data Communications	RF Microwave Amplifiers	Unallocated	Total
Net sales	$ 48,852	53,046	13,157	—	$	115,055
Operating income (expense)	10,891	12,753	1,035	(6,020	)	18,659
Interest income and other	49	1	—	4,397		4,447
Interest expense	6	9	—	662		677
Depreciation and amortization	1,667	516	259	2,768		5,210
Expenditure for long-lived assets, including intangibles	2,884	475	239	39		3,637
Total assets at October 31, 2007	130,065	63,703	38,275	345,263		577,306

| (in
thousands) | Three months
ended October 31, 2006 — Telecommunications Transmission | Mobile Data Communications | RF Microwave Amplifiers | Unallocated | Total | |
| --- | --- | --- | --- | --- | --- | --- |
| Net
sales | $
52,030 | 35,655 | 9,385 | — | $ | 97,070 |
| Operating
income (expense) | 12,900 | 6,109 | 849 | (4,876 | ) | 14,982 |
| Interest
income and other | 26 | 5 | — | 3,144 | | 3,175 |
| Interest
expense | 12 | 22 | — | 661 | | 695 |
| Depreciation
and amortization | 1,690 | 342 | 339 | 1,856 | | 4,227 |
| Expenditure
for long-lived assets, including intangibles | 2,045 | 3,286 | 316 | 32 | | 5,679 |
| Total
assets at October 31, 2006 | 141,832 | 39,934 | 26,711 | 253,365 | | 461,842 |

| The telecommunications
transmission segment operates a high-volume technology manufacturing center
that is utilized, in part, by the mobile data communications and RF
microwave amplifiers segments. Accordingly, the telecommunications
transmission segment benefits from the related increased operating
efficiencies. |
| --- |
| Intersegment sales for
the three months ended October 31, 2007 and 2006 by the telecommunications
transmission segment to the RF microwave amplifiers segment were $2,168,000
and $1,841,000, respectively. For the three months ended October 31, 2007
and 2006, intersegment sales by the telecommunications transmission segment
to the mobile data communications segment were $21,019,000 and $17,405,000,
respectively. Intersegment sales have been eliminated from the tables
above. |

13

| (14) |
| --- |
| Intangible
assets with finite lives as of October 31, 2007 and July 31, 2007 are as
follows: |

| Weighted
Average Amortization Period | | Gross
Carrying Amount | Accumulated Amortization | Net Carrying
Amount |
| --- | --- | --- | --- | --- |
| Existing
technology | 6.94 | $ 13,822,000 | 11,304,000 | $ 2,518,000 |
| Proprietary,
core and licensed technology | 8.31 | 5,851,000 | 2,537,000 | 3,314,000 |
| Other | 5.61 | 975,000 | 550,000 | 425,000 |
| Total | | $ 20,648,000 | 14,391,000 | $ 6,257,000 |

| Weighted
Average Amortization Period | | Gross
Carrying Amount | Accumulated Amortization | Net Carrying
Amount |
| --- | --- | --- | --- | --- |
| Existing
technology | 7.22 | $ 12,903,000 | 11,168,000 | $ 1,735,000 |
| Proprietary,
core and licensed technology | 8.31 | 5,851,000 | 2,326,000 | 3,525,000 |
| Other | 5.61 | 975,000 | 518,000 | 457,000 |
| Total | | $ 19,729,000 | 14,012,000 | $ 5,717,000 |

| Amortization expense
for the three months ended October 31, 2007 and 2006 was $379,000 and
$649,000, respectively. The estimated amortization expense related to
intangible assets with finite lives for the twelve months ending October
31, 2008, 2009, 2010, 2011 and 2012 is $1,733,000, $1,683,000, $1,521,000,
$927,000 and $207,000, respectively. |
| --- |
| The changes in carrying
amount of goodwill by segment for the three months ended October 31, 2007
is as follows: |

| Balance at
July 31, 2007 | Telecommunications Transmission — $ 8,817,000 | 7,148,000 | | 8,422,000 | Total — $ 24,387,000 | |
| --- | --- | --- | --- | --- | --- | --- |
| Acquisition of
Insite (See Note 5) | — | (24,000 | ) | — | (24,000 | ) |
| Balance at
October 31, 2007 | $ 8,817,000 | 7,124,000 | | 8,422,000 | $ 24,363,000 | |

14

| (15) |
| --- |
| Subpoena
Related to Brazil Contract |
| In October 2007, the
Company’s Florida-based subsidiary, Comtech Systems, Inc.
(“CSI”), received a customs export enforcement subpoena from
the U.S. Immigration and Customs Enforcement (“ICE”) branch of
the Department of Homeland Security. The subpoena relates to CSI’s
$1,982,000 contract with the Brazilian Naval Commission (“the Brazil
contract”) and it required the production of all books, records and
documents, including copies of contracts, invoices and payments related to
agreements between CSI, its agent, its subcontractor and the Brazilian
government. The Company believes that the ICE investigation is focused
primarily on whether or not CSI was in compliance with export-related laws
and regulations, including the International Traffic in Arms Regulations
and the Export Administration Regulations. CSI produced documents in
response to the subpoena request in November 2007 and will continue to
provide related information to ICE. The Company believes that CSI made a
good faith effort to comply with applicable regulations. |
| Customs officials have
detained certain inventory related to the Brazil contract pending
resolution of this matter. The Company has not recorded any revenue
associated with this contract and the related inventory (including
inventory that has been detained) had a net book value of $1,110,000 as of
October 31, 2007. The Company believes that all of the inventory can be
sold to other customers if the Brazilian government cancels the contract
due to the delays resulting from the detention of the inventory and the
inventory is ultimately returned to the Company in saleable
condition. |
| The Company is cooperating with the ICE investigation and intends to continue to do so. The Company is also conducting its own investigation of this matter. Because these investigations are ongoing, the Company cannot
predict the ultimate outcome of this matter at this time. Violations of
U.S. export control laws and regulations that are identified by the U.S.
government could result in civil or criminal fines and/or penalties, and/or
result in an injunction against CSI, all of
which could, in the aggregate, materially impact the Company’s
business, results of operations and cash flows. |
| Hurricane-Related
Settlement |
| Since fiscal 2005, the
Company has been a party to litigation with one of its insurance providers
and a general contractor (and one of its subcontractors) who performed
restoration and repair services at two of the Company’s leased
facilities which had experienced hurricane damage. In November 2007, the
Company settled the matter. The settlement did not have a material impact
on the Company’s consolidated financial condition or results of
operations for the three months ended October 31, 2007. |
| Other Legal
Proceedings |
| In March 2007, a
lawsuit was brought against the Company in the Federal District Court for
the Western District of Texas by a company that claims it was a consultant
and a reseller of certain of the Company’s products and that it is
owed damages for alleged lost profits, as well as punitive damages, costs
and attorneys’ fees. The Company believes that it has substantial
legal and factual defenses to the plaintiff’s allegations and intends
to vigorously defend itself in this matter. The Company does not expect
that the ultimate outcome of this matter will have a material adverse
effect on its consolidated financial condition or results of
operations. |
| The Company is party to
certain other legal actions, which arise in the normal course of business.
Although the ultimate outcome of litigation is difficult to accurately
predict, the Company believes that the outcome of these actions will not
have a material effect on its consolidated financial condition or results
of operations. |

15

| (16) |
| --- |
| The consolidating
financial information presented below reflects information regarding the
Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary of the
Company’s 2.0% convertible senior notes. Tolt is included in the
guarantor column for all periods presented. The Parent’s expenses
associated with supporting the operations of its subsidiaries are allocated
to the respective Guarantor Subsidiaries and the Non-Guarantor Subsidiary.
The consolidating financial information presented herein is not utilized by
the chief operating decision-maker in making operating decisions and
assessing performance. |
| The following reflects
the condensed consolidating balance sheet as of October 31, 2007: |

| | Parent | | | | | | | | Consolidated
Total | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Assets | | | | | | | | | | |
| Current
assets: | | | | | | | | | | |
| Cash
and cash equivalents | $ 331,330,000 | | (61,000 | ) | 2,122,000 | | — | | $ 333,391,000 | |
| Accounts
receivable, net | — | | 84,002,000 | | 5,515,000 | | — | | 89,517,000 | |
| Inventories,
net | — | | 70,588,000 | | 1,097,000 | | — | | 71,685,000 | |
| Prepaid
expenses and other current assets | 1,555,000 | | 5,304,000 | | 3,912,000 | | (825,000 | ) | 9,946,000 | |
| Deferred
tax asset – current | 1,228,000 | | 8,388,000 | | — | | — | | 9,616,000 | |
| Total
current assets | 334,113,000 | | 168,221,000 | | 12,646,000 | | (825,000 | ) | 514,155,000 | |
| Property,
plant and equipment, net | 834,000 | | 28,877,000 | | 638,000 | | — | | 30,349,000 | |
| Investment in
subsidiaries | 261,292,000 | | 4,219,000 | | — | | (265,511,000 | ) | — | |
| Goodwill | — | | 23,416,000 | | 947,000 | | — | | 24,363,000 | |
| Intangibles
with finite lives, net | — | | 5,556,000 | | 701,000 | | — | | 6,257,000 | |
| Deferred tax
asset – non-current | — | | — | | 190,000 | | (190,000 | ) | — | |
| Deferred
financing costs, net | 1,767,000 | | — | | — | | — | | 1,767,000 | |
| Other assets,
net | 56,000 | | 336,000 | | 23,000 | | — | | 415,000 | |
| Intercompany
receivables | — | | 107,224,000 | | 113,000 | | (107,337,000 | ) | — | |
| Total
assets | $ 598,062,000 | | 337,849,000 | | 15,258,000 | | (373,863,000 | ) | $ 577,306,000 | |
| Liabilities
and Stockholders’ Equity | | | | | | | | | | |
| Current
liabilities: | | | | | | | | | | |
| Accounts
payable | $ 265,000 | | 26,453,000 | | 1,210,000 | | — | | 27,928,000 | |
| Accrued
expenses and other current liabilities | 4,947,000 | | 33,690,000 | | 1,504,000 | | — | | 40,141,000 | |
| Customer
advances and deposits | — | | 13,295,000 | | 8,325,000 | | — | | 21,620,000 | |
| Current
installments of other obligations | — | | 137,000 | | — | | — | | 137,000 | |
| Interest
payable | 525,000 | | — | | — | | — | | 525,000 | |
| Income
taxes payable - current | 4,687,000 | | — | | — | | (825,000 | ) | 3,862,000 | |
| Total
current liabilities | 10,424,000 | | 73,575,000 | | 11,039,000 | | (825,000 | ) | 94,213,000 | |
| Convertible
senior notes | 105,000,000 | | — | | — | | — | | 105,000,000 | |
| Other
obligations, less current installments | — | | 73,000 | | — | | — | | 73,000 | |
| Income taxes
payable – non-current | 2,854,000 | | — | | — | | — | | 2,854,000 | |
| Deferred tax
liability – non-current | 5,465,000 | | 2,909,000 | | — | | (190,000 | ) | 8,184,000 | |
| Intercompany
payables | 107,337,000 | | — | | — | | (107,337,000 | ) | — | |
| Total
liabilities | 231,080,000 | | 76,557,000 | | 11,039,000 | | (108,352,000 | ) | 210,324,000 | |
| Commitments
and contingencies | | | | | | | | | | |
| Stockholders’
equity: | | | | | | | | | | |
| Preferred
stock | — | | — | | — | | — | | — | |
| Common
stock | 2,424,000 | | 4,000 | | — | | (4,000 | ) | 2,424,000 | |
| Additional
paid-in capital | 172,201,000 | | 81,410,000 | | 5,187,000 | | (86,597,000 | ) | 172,201,000 | |
| Retained
earnings (deficit) | 192,542,000 | | 179,878,000 | | (968,000 | ) | (178,910,000 | ) | 192,542,000 | |
| | 367,167,000 | | 261,292,000 | | 4,219,000 | | (265,511,000 | ) | 367,167,000 | |
| Less: | | | | | | | | | | |
| Treasury
stock | (185,000 | ) | — | | — | | — | | (185,000 | ) |
| Total
stockholders’ equity | 366,982,000 | | 261,292,000 | | 4,219,000 | | (265,511,000 | ) | 366,982,000 | |
| Total
liabilities and stockholders’ equity | $ 598,062,000 | | 337,849,000 | | 15,258,000 | | (373,863,000 | ) | $ 577,306,000 | |

16

(16)
The following
reflects the condensed consolidating balance sheet as of July 31, 2007:

| | Parent | | | | | | | Consolidated
Total | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Assets | | | | | | | | | |
| Current
assets: | | | | | | | | | |
| Cash
and cash equivalents | $ 340,617,000 | | 983,000 | 1,303,000 | | — | | $ 342,903,000 | |
| Accounts
receivable, net | — | | 66,240,000 | 7,345,000 | | — | | 73,585,000 | |
| Inventories,
net | — | | 61,337,000 | 650,000 | | — | | 61,987,000 | |
| Prepaid
expenses and other current assets | 1,868,000 | | 4,311,000 | 555,000 | | — | | 6,734,000 | |
| Deferred
tax asset - current | 645,000 | | 8,735,000 | — | | — | | 9,380,000 | |
| Total
current assets | 343,130,000 | | 141,606,000 | 9,853,000 | | — | | 494,589,000 | |
| Property,
plant and equipment, net | 844,000 | | 27,796,000 | 642,000 | | — | | 29,282,000 | |
| Investment in
subsidiaries | 248,952,000 | | 4,755,000 | — | | (253,707,000 | ) | — | |
| Goodwill | — | | 23,440,000 | 947,000 | | — | | 24,387,000 | |
| Intangibles
with finite lives, net | — | | 4,972,000 | 745,000 | | — | | 5,717,000 | |
| Deferred tax
asset - non-current | — | | — | 190,000 | | (190,000 | ) | — | |
| Deferred
financing costs, net | 1,903,000 | | — | — | | — | | 1,903,000 | |
| Other assets,
net | 56,000 | | 386,000 | 22,000 | | — | | 464,000 | |
| Intercompany
receivables | — | | 126,210,000 | — | | (126,210,000 | ) | — | |
| Total
assets | $ 594,885,000 | | 329,165,000 | 12,399,000 | | (380,107,000 | ) | $ 556,342,000 | |
| Liabilities
and Stockholders’ Equity | | | | | | | | | |
| Current
liabilities: | | | | | | | | | |
| Accounts
payable | $ 374,000 | | 25,616,000 | 147,000 | | — | | $ 26,137,000 | |
| Accrued
expenses and other current liabilities | 10,340,000 | | 36,378,000 | 614,000 | | — | | 47,332,000 | |
| Customer
advances and deposits | — | | 15,189,000 | 4,867,000 | | — | | 20,056,000 | |
| Current
installments of other obligations | — | | 135,000 | — | | — | | 135,000 | |
| Interest
payable | 1,050,000 | | — | — | | — | | 1,050,000 | |
| Income
taxes payable | 3,283,000 | | — | (487,000 | ) | — | | 2,796,000 | |
| Total
current liabilities | 15,047,000 | | 77,318,000 | 5,141,000 | | — | | 97,506,000 | |
| Convertible
senior notes | 105,000,000 | | — | — | | — | | 105,000,000 | |
| Other
obligations, less current installments | — | | 108,000 | — | | — | | 108,000 | |
| Deferred tax
liability - non-current | 5,363,000 | | 2,787,000 | — | | (190,000 | ) | 7,960,000 | |
| Intercompany
payables | 123,707,000 | | — | 2,503,000 | | (126,210,000 | ) | — | |
| Total
liabilities | 249,117,000 | | 80,213,000 | 7,644,000 | | (126,400,000 | ) | 210,574,000 | |
| Commitments
and contingencies | | | | | | | | | |
| Stockholders’
equity: | | | | | | | | | |
| Preferred
stock | — | | — | — | | — | | — | |
| Common
stock | 2,402,000 | | 4,000 | — | | (4,000 | ) | 2,402,000 | |
| Additional
paid-in capital | 165,703,000 | | 81,410,000 | 5,187,000 | | (86,597,000 | ) | 165,703,000 | |
| Retained
earnings (deficit) | 177,848,000 | | 167,538,000 | (432,000 | ) | (167,106,000 | ) | 177,848,000 | |
| | 345,953,000 | | 248,952,000 | 4,755,000 | | (253,707,000 | ) | 345,953,000 | |
| Less: | | | | | | | | | |
| Treasury
stock | (185,000 | ) | — | — | | — | | (185,000 | ) |
| Total
stockholders’ equity | 345,768,000 | | 248,952,000 | 4,755,000 | | (253,707,000 | ) | 345,768,000 | |
| Total
liabilities and stockholders’ equity | $ 594,885,000 | | 329,165,000 | 12,399,000 | | (380,107,000 | ) | $ 556,342,000 | |

17

| (16) |
| --- |
| The following reflects
the condensed consolidating statement of operations for the three months
ended October 31, 2007: |

| Net
sales | Parent — $ — | | 112,681,000 | | 2,460,000 | | (86,000 | ) | Consolidated
Total — $ 115,055,000 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cost of
sales | — | | 63,479,000 | | 1,184,000 | | (86,000 | ) | 64,577,000 | |
| Gross
Profit | — | | 49,202,000 | | 1,276,000 | | — | | 50,478,000 | |
| Expenses: | | | | | | | | | | |
| Selling,
general and administrative | — | | 18,933,000 | | 1,466,000 | | — | | 20,399,000 | |
| Research
and development | — | | 10,257,000 | | 784,000 | | — | | 11,041,000 | |
| Amortization
of intangibles | — | | 335,000 | | 44,000 | | — | | 379,000 | |
| | — | | 29,525,000 | | 2,294,000 | | — | | 31,819,000 | |
| Operating
income (loss) | — | | 19,677,000 | | (1,018,000 | ) | — | | 18,659,000 | |
| Other expense
(income): | | | | | | | | | | |
| Interest
expense | 662,000 | | 15,000 | | — | | — | | 677,000 | |
| Interest
income and other | (4,397,000 | ) | (41,000 | ) | (9,000 | ) | — | | (4,447,000 | ) |
| Income (loss)
before provision for (benefit from) income taxes and equity in undistributed earnings (loss) of subsidiaries | 3,735,000 | | 19,703,000 | | (1,009,000 | ) | — | | 22,429,000 | |
| Provision for
(benefit from) income taxes | 1,382,000 | | 6,826,000 | | (473,000 | ) | — | | 7,735,000 | |
| Net earnings
(loss) before equity in undistributed earnings (loss) of subsidiaries | 2,353,000 | | 12,877,000 | | (536,000 | ) | — | | 14,694,000 | |
| Equity in
undistributed earnings (loss) of subsidiaries | 12,341,000 | | (536,000 | ) | — | | (11,805,000 | ) | — | |
| Net income
(loss) | $ 14,694,000 | | 12,341,000 | | (536,000 | ) | (11,805,000 | ) | $ 14,694,000 | |

The following reflects the condensed consolidating statement of operations for the three months ended October 31, 2006:

| Net
sales | Parent — $ — | | 93,300,000 | | 3,925,000 | | (155,000 | ) | Consolidated
Total — $ 97,070,000 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cost of
sales | — | | 55,916,000 | | 1,934,000 | | (155,000 | ) | 57,695,000 | |
| Gross
Profit | — | | 37,384,000 | | 1,991,000 | | — | | 39,375,000 | |
| Expenses: | | | | | | | | | | |
| Selling,
general and administrative | — | | 15,548,000 | | 1,039,000 | | — | | 16,587,000 | |
| Research
and development | — | | 6,742,000 | | 415,000 | | — | | 7,157,000 | |
| Amortization
of intangibles | — | | 605,000 | | 44,000 | | — | | 649,000 | |
| | — | | 22,895,000 | | 1,498,000 | | — | | 24,393,000 | |
| Operating
income | — | | 14,489,000 | | 493,000 | | — | | 14,982,000 | |
| Other expense
(income): | | | | | | | | | | |
| Interest
expense | 661,000 | | 34,000 | | — | | — | | 695,000 | |
| Interest
income and other | (3,145,000 | ) | (18,000 | ) | (12,000 | ) | — | | (3,175,000 | ) |
| Income before
provision for income taxes and equity in undistributed earnings of subsidiaries | 2,484,000 | | 14,473,000 | | 505,000 | | — | | 17,462,000 | |
| Provision for
income taxes | 919,000 | | 5,569,000 | | 147,000 | | — | | 6,635,000 | |
| Net earnings
before equity in undistributed earnings of subsidiaries | 1,565,000 | | 8,904,000 | | 358,000 | | — | | 10,827,000 | |
| Equity in
undistributed earnings of subsidiaries | 9,262,000 | | 358,000 | | — | | (9,620,000 | ) | — | |
| Net
income | $ 10,827,000 | | 9,262,000 | | 358,000 | | (9,620,000 | ) | $ 10,827,000 | |

18

| (16) |
| --- |
| The following reflects
the condensed consolidating statement of cash flows for the three months
ended October 31, 2007: |

	Parent								Consolidated Total
Cash flows
from operating activities:
Net income
(loss)	$ 14,694,000		12,341,000		(536,000	)	(11,805,000	)	$ 14,694,000
Adjustments to reconcile
net income (loss) to net cash (used in) provided by
operating activities:
Depreciation
and amortization of property, plant and
equipment	50,000		2,005,000		57,000		—		2,112,000
Amortization of
intangible assets with finite lives	—		335,000		44,000		—		379,000
Amortization of
stock-based compensation	1,073,000		1,556,000		90,000		—		2,719,000
Amortization of
deferred financing costs	136,000		—		—		—		136,000
Provision for
allowance for doubtful accounts	—		44,000		31,000		—		75,000
Provision for
excess and obsolete inventory	—		539,000		7,000		—		546,000
Excess income
tax benefit from stock award exercises	(505,000	)	—		—		—		(505,000	)
Deferred income
tax (benefit) expense	(481,000	)	469,000		—		—		(12,000	)
Equity in
undistributed (earnings) loss of subsidiaries	(12,341,000	)	536,000		—		11,805,000		—
Intercompany
accounts	(14,812,000	)	17,429,000		(2,617,000	)	—		—
Changes in
assets and liabilities, net of effects of acquisition:
Accounts
receivable	—		(17,806,000	)	1,799,000		—		(16,007,000	)
Inventories	—		(9,790,000	)	(454,000	)	—		(10,244,000	)
Prepaid
expenses and other current assets	313,000		(1,794,000	)	(3,357,000	)	825,000		(4,013,000	)
Other
assets	—		50,000		(1,000	)	—		49,000
Accounts
payable	(109,000	)	912,000		1,063,000		—		1,866,000
Accrued
expenses and other current liabilities	(5,393,000	)	(2,399,000	)	801,000		—		(6,991,000	)
Customer
advances and deposits	—		(1,894,000	)	3,458,000		—		1,564,000
Interest
payable	(525,000	)	—		—		—		(525,000	)
Income
taxes payable	4,763,000		—		487,000		(825,000	)	4,425,000
Net cash (used
in) provided by operating activities	(13,137,000	)	2,533,000		872,000		—		(9,732,000	)
Cash flows from investing
activities:
Purchases
of property, plant and equipment	(40,000	)	(3,086,000	)	(53,000	)	—		(3,179,000	)
Purchase
of proprietary technology	—		(193,000	)	—		—		(193,000	)
Payments
for business acquisition	—		(265,000	)	—		—		(265,000	)
Net cash used
in investing activities	(40,000	)	(3,544,000	)	(53,000	)	—		(3,637,000	)
Cash flows from financing
activities:
Principal
payments on other obligations	—		(33,000	)	—		—		(33,000	)
Excess
income tax benefit from stock award exercises	505,000		—		—		—		505,000
Proceeds
from exercises of stock options	3,166,000		—		—		—		3,166,000
Proceeds
from issuance of employee stock purchase plan shares	219,000		—		—		—		219,000
Net cash
provided by (used in) financing activities	3,890,000		(33,000	)	—		—		3,857,000
Net
(decrease) increase in cash and cash equivalents	(9,287,000	)	(1,044,000	)	819,000		—		(9,512,000	)
Cash and
cash equivalents at beginning of period	340,617,000		983,000		1,303,000		—		342,903,000
Cash and
cash equivalents at end of period	$ 331,330,000		(61,000	)	2,122,000		—		$ 333,391,000

19

| (16) |
| --- |
| The following reflects
the condensed consolidating statement of cash flows for the three months
ended October 31, 2006: |

| | Parent | | | | | | | | Consolidated
Total | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cash flows from operating
activities: | | | | | | | | | | |
| Net income | $ 10,827,000 | | 9,262,000 | | 358,000 | | (9,620,000 | ) | $ 10,827,000 | |
| Adjustments to reconcile
net income to net cash provided by (used in) operating
activities: | | | | | | | | | | |
| Depreciation
and amortization of property, plant and
equipment | 46,000 | | 1,679,000 | | 43,000 | | — | | 1,768,000 | |
| Amortization of
intangible assets with finite lives | — | | 605,000 | | 44,000 | | — | | 649,000 | |
| Amortization of
stock-based compensation | 724,000 | | 1,085,000 | | 1,000 | | — | | 1,810,000 | |
| Amortization of
deferred financing costs | 137,000 | | — | | — | | — | | 137,000 | |
| Gain on
disposal of property, plant and equipment | — | | (4,000 | ) | — | | — | | (4,000 | ) |
| Provision for
(benefit from) allowance for doubtful
accounts | — | | 140,000 | | (113,000 | ) | — | | 27,000 | |
| Provision for
(benefit from) excess and obsolete inventory | — | | 579,000 | | (29,000 | ) | — | | 550,000 | |
| Excess income
tax benefit from stock award exercises | (295,000 | ) | — | | — | | — | | (295,000 | ) |
| Deferred income
tax expense | 86,000 | | 374,000 | | — | | — | | 460,000 | |
| Equity in
undistributed earnings of subsidiaries | (9,262,000 | ) | (358,000 | ) | — | | 9,620,000 | | — | |
| Intercompany
accounts | (815,000 | ) | 2,252,000 | | (1,437,000 | ) | — | | — | |
| Changes in
assets and liabilities, net of effects of acquisition: | | | | | | | | | | |
| Accounts
receivable | — | | (271,000 | ) | 991,000 | | — | | 720,000 | |
| Inventories | — | | (11,247,000 | ) | 12,000 | | — | | (11,235,000 | ) |
| Prepaid
expenses and other current assets | (368,000 | ) | 760,000 | | (163,000 | ) | — | | 229,000 | |
| Other
assets | — | | 172,000 | | 1,000 | | — | | 173,000 | |
| Accounts
payable | (42,000 | ) | (2,895,000 | ) | 782,000 | | — | | (2,155,000 | ) |
| Accrued
expenses and other current liabilities | (3,499,000 | ) | (6,275,000 | ) | (1,024,000 | ) | — | | (10,798,000 | ) |
| Customer
advances and deposits | — | | 2,784,000 | | 65,000 | | — | | 2,849,000 | |
| Deferred
service revenue | — | | (2,536,000 | ) | — | | — | | (2,536,000 | ) |
| Interest
payable | (525,000 | ) | — | | — | | — | | (525,000 | ) |
| Income
taxes payable | 3,465,000 | | — | | 255,000 | | — | | 3,720,000 | |
| Net cash
provided by (used in) operating activities | 479,000 | | (3,894,000 | ) | (214,000 | ) | — | | (3,629,000 | ) |
| Cash flows from investing
activities: | | | | | | | | | | |
| Purchases
of property, plant and equipment | (34,000 | ) | (2,509,000 | ) | (230,000 | ) | — | | (2,773,000 | ) |
| Purchase
of other intangibles with finite lives | — | | (2,191,000 | ) | — | | — | | (2,191,000 | ) |
| Net cash used
in investing activities | (34,000 | ) | (4,700,000 | ) | (230,000 | ) | — | | (4,964,000 | ) |
| Cash flows from financing
activities: | | | | | | | | | | |
| Principal
payments on other obligations | — | | (49,000 | ) | — | | — | | (49,000 | ) |
| Excess
income tax benefit from stock award exercises | 295,000 | | — | | — | | — | | 295,000 | |
| Proceeds
from exercises of stock options | 2,140,000 | | — | | — | | — | | 2,140,000 | |
| Proceeds
from issuance of employee stock purchase plan shares | 180,000 | | — | | — | | — | | 180,000 | |
| Net cash
provided by (used in) financing activities | 2,615,000 | | (49,000 | ) | — | | — | | 2,566,000 | |
| Net
increase (decrease) in cash and cash equivalents | 3,060,000 | | (8,643,000 | ) | (444,000 | ) | — | | (6,027,000 | ) |
| Cash and
cash equivalents at beginning of period | 238,298,000 | | 9,949,000 | | 3,340,000 | | — | | 251,587,000 | |
| Cash and
cash equivalents at end of period | $ 241,358,000 | | 1,306,000 | | 2,896,000 | | — | | $ 245,560,000 | |

20

| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| --- |
| AND
RESULTS OF OPERATIONS |
| CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS Certain
information in this Quarterly Report on Form 10-Q contains forward-looking
statements, including but not limited to, information relating to our future
performance and financial condition, our plans and objectives and our
assumptions regarding such future performance, financial condition, plans and
objectives that involve certain significant known and unknown risks and
uncertainties and other factors not under our control which may cause actual
results, future performance and financial condition, and achievement of our
plans and objectives to be materially different from the results, performance
or other expectations implied by these forward-looking statements. These
factors include the timing of receipt of, and our performance on, new orders
that can cause significant fluctuations in net sales and operating results, the
timing and funding of government contracts, adjustments to gross profits on
long-term contracts, risks associated with international sales, rapid
technological change, evolving industry standards, frequent new product
announcements and enhancements, changing customer demands, changes in
prevailing economic and political conditions, and other factors described
herein and in our other filings with the Securities and Exchange
Commission. OVERVIEW We
design, develop, produce and market innovative products, systems and services
for advanced communications solutions. We believe many of our solutions play a
vital role in providing or enhancing communication capabilities when
terrestrial communications infrastructure is unavailable or
ineffective. We
conduct our business through three complementary operating segments:
telecommunications transmission, mobile data communications and RF microwave
amplifiers. We sell our products to a diverse customer base in the global
commercial and government communications markets. We believe we are a leader in
the market segments that we serve. Our
telecommunications transmission segment provides sophisticated equipment and
systems that are used to enhance satellite transmission efficiency and that
enable wireless communications in environments where terrestrial communications
are unavailable, inefficient or too expensive. Our telecommunications
transmission segment also operates our high-volume technology manufacturing
center that is utilized, in part, by our mobile data communications and RF
microwave amplifiers segments. Accordingly, our telecommunications segment
benefits from the related increased operating efficiencies. Our mobile data
communications segment provides customers with an integrated solution,
including mobile satellite transceivers and satellite network support, to
enable global satellite-based communications when mobile, real-time, secure
transmission is required for applications including logistics, support and
battlefield command and control. Our RF microwave amplifiers segment designs,
manufactures and markets solid-state, high-power, broadband RF microwave
amplifier products. A
substantial portion of our sales may be derived from a limited number of
relatively large customer contracts, such as our Movement Tracking System
(“MTS”) contract with the U.S. Army and our U.S. Army’s Force
XXI Battle Command, Brigade and Below command and control systems (also known
as Blue Force Tracking (“BFT”)) contract, for which the timing of
revenues cannot be predicted. Quarterly and period-to-period sales and
operating results may be significantly affected by one or more of such
contracts. In addition, our gross profit is affected by a variety of factors,
including the mix of products, systems and services sold, production
efficiencies, estimates of warranty expense, price competition and general
economic conditions. Our gross profit may also be affected by the impact of any
cumulative adjustments to contracts that are accounted for under the
percentage-of-completion method. Our contracts with the U.S. government can be
terminated at any time and orders are subject to unpredictable funding,
deployment and technology decisions by the U.S. government. Some of these
contracts, such as the MTS and BFT contracts, are indefinite
delivery/indefinite quantity (“IDIQ”) contracts, and as such, the
U.S. Army is not obligated to purchase any equipment or services under the
contracts. Accordingly, we can experience significant fluctuations in sales and
operating results from quarter-to-quarter and period-to-period comparisons may
not be indicative of a trend or future performance. |

21

| Revenue from the sale of our products is generally recognized when the earnings
process is complete, upon shipment or customer acceptance. Revenue from
contracts relating to the design, development or manufacture of complex
electronic equipment to a buyer’s specification or to provide services
relating to the performance of such contracts is generally recognized under
AICPA Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts” (“SOP No.
81-1”). Revenue from contracts that contain multiple elements that are
not accounted for under SOP No. 81-1 are generally accounted for in accordance
with Emerging Issues Task Force (“EITF”) Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables.”
Revenue from these contracts is allocated to each respective element based on
each element’s relative fair value and is recognized when the respective
revenue recognition criteria for each element are met. CRITICAL ACCOUNTING
POLICIES |
| --- |
| We consider certain
accounting policies to be critical due to the estimation process involved in
each. |
| Revenue
Recognition on Long-Term Contracts. Revenues and related costs from
long-term contracts relating to the design, development or manufacture of
complex electronic equipment to a buyer’s specification or to provide
services relating to the performance of such contracts are recognized in
accordance with SOP No. 81-1. We primarily apply the
percentage-of-completion method and generally recognize revenue based on
the relationship of total costs incurred to total projected costs, or,
alternatively, based on output measures, such as units delivered. Profits
expected to be realized on such contracts are based on total estimated
sales for the contract compared to total estimated costs, including
warranty costs, at completion of the contract. These estimates are reviewed
and revised periodically throughout the lives of the contracts, and
adjustments to profits resulting from such revisions are made cumulative to
the date of the change. Estimated losses on long-term contracts are
recorded in the period in which the losses become evident. Long-term U.S.
government cost-reimbursable type contracts are also specifically covered
by Accounting Research Bulletin No. 43 “Government Contracts,
Cost-Plus Fixed-Fee Contracts” (“ARB No. 43”), in
addition to SOP No. 81-1. |
| We have been engaged in
the production and delivery of goods and services on a continual basis
under contractual arrangements for many years. Historically, we have
demonstrated an ability to accurately estimate revenues and expenses
relating to our long-term contracts. However, there exist inherent risks
and uncertainties in estimating revenues, expenses and progress toward
completion, particularly on larger or longer-term contracts. If we do not
accurately estimate the total sales, related costs and progress towards
completion on such contracts, the estimated gross margins may be
significantly impacted or losses may need to be recognized in future
periods. Any such resulting changes in margins or contract losses could be
material to our results of operations and financial condition. |
| In addition, most
government contracts have termination for convenience clauses that provide
the customer with the right to terminate the contract at any time. Such
terminations could impact the assumptions regarding total contract revenues
and expenses utilized in recognizing profit under the
percentage-of-completion method of accounting. Changes to these assumptions
could materially impact our results of operations and financial position.
Historically, we have not experienced material terminations of our
long-term contracts. |
| We also
address customer acceptance provisions in assessing our ability to perform our
contractual obligations under long-term contracts. Our inability to perform on
our long-term contracts could materially impact our results of operations and
financial condition. Historically, we have been able to perform on our
long-term contracts. |
| Accounting for
Stock-Based Compensation . As discussed further in “Notes
to Condensed Consolidated Financial Statements – Note (3) Stock-Based
Compensation,” we adopted Statement of Financial Accounting
Standards (“SFAS”) No. 123(R) using the modified prospective
method. |
| We have used and expect
to continue to use the Black-Scholes option pricing model to compute the
estimated fair value of stock-based awards. The Black-Scholes option
pricing model includes assumptions regarding dividend yield, expected
volatility, expected option term and risk-free interest rates. The
assumptions used in computing the fair value of stock-based awards reflect
our best estimates, but involve uncertainties relating to market and other
conditions, many of which are outside of our control. We estimate expected
volatility by considering the historical volatility of our stock, the
implied volatility of publicly traded stock options in our stock and our
expectations of volatility for the expected term of stock-based
compensation awards. As a result, if other assumptions or estimates had
been used for options granted, stock-based compensation expense that was
recorded could have been materially different. Furthermore, if different
assumptions are used in future periods, stock-based compensation expense
could be materially impacted in the future. |

22

Impairment of Goodwill and Other Intangible Assets. As of October 31, 2007, our company’s goodwill and other intangible assets aggregated $30.6 million. In assessing the recoverability of goodwill and other intangibles, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to our results of operations. Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Some of our warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. As such, if we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition. Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The provision for income taxes is based on domestic and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize interest and penalties related to uncertain tax positions in income tax expense. The U.S. Federal government is our most significant income tax jurisdiction. Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. As discussed in “Notes to Condensed Consolidated Financial Statements – Note (10) Income Taxes”, on August 1, 2007 we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN No. 48”). We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more-likely-than-not that the tax position will be sustained upon examination, based upon the technical merits of the position. For tax positions that are determined to be more-likely-than-not to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The development of reserves for income tax positions requires consideration of timing and judgments about tax issues and potential outcomes, and is a subjective critical estimate. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition. Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and future usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charges could be material to our results of operations and financial condition. Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain international customers. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition.

23

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006 Net Sales. Consolidated net sales were $115.1 million and $97.1 million for the three months ended October 31, 2007 and 2006, respectively, representing an increase of $18.0 million, or 18.5%. The increase in net sales reflects significant growth in both our mobile data communications and RF microwave amplifiers segments, partially offset by lower net sales in our telecommunications transmission segment. Net sales in our telecommunications transmission segment were $48.9 million and $52.0 million for the three months ended October 31, 2007 and 2006, respectively, a decrease of $3.1 million, or 6.0%. The decrease in net sales in this segment primarily reflects decreased sales of our over-the-horizon microwave systems, partially offset by an increase in sales of our satellite earth station products. Sales of over-the-horizon microwave systems for the three months ended October 31, 2007 were lower than the three months ended October 31, 2006 primarily due to lower sales of our 16 Mbps troposcatter modem upgrade kits for use on the U.S. Department of Defense’s (“DoD”) AN/TRC-170 digital troposcatter terminals and lower sales, both direct and indirect, to our North African country end-customer. We believe our North African end-customer is between major phases of a multi-year roll-out of a large project. Sales of our satellite earth station products for the three months ended October 31, 2007 were higher than the three months ended October 31, 2006 as we continue to benefit from increased demand for our bandwidth efficient satellite earth station modems, including those used to support cellular backhaul applications. Our telecommunications transmission segment represented 42.5% of consolidated net sales for the three months ended October 31, 2007 as compared to 53.6% for the three months ended October 31, 2006. Sales and profitability in our telecommunications transmission segment can fluctuate from period-to-period due to many factors including (i) the book-and-ship nature of our satellite earth station products and (ii) the timing of, and our related performance on, contracts from the U.S. government and international customers for our over-the-horizon microwave products. That notwithstanding, we believe that sales in our telecommunications transmission segment should increase in fiscal 2008 as compared to fiscal 2007 based on expectations of continued strong satellite earth station product bookings and the receipt of additional orders from the U.S. DoD for AN/TRC-170 equipment. Although we anticipate receiving another contract relating to our North African end-customer in fiscal 2008, we do not expect that it will contribute significantly to revenue until fiscal 2009. Net sales in our mobile data communications segment were $53.0 million and $35.7 million for the three months ended October 31, 2007 and 2006, respectively, an increase of $17.3 million, or 48.5%. The increase in net sales was due to the significant increase in deliveries to the U.S. Army in connection with our new MTS and BFT contracts that were awarded in August 2007. Net sales for the three months ended October 31, 2006 included sales of $1.2 million relating to a favorable gross profit adjustment on our original MTS contract. Our mobile data communications segment represented 46.0% of consolidated net sales for the three months ended October 31, 2007 as compared to 36.7% for the three months ended October 31, 2006. Sales and profitability in our mobile data communications segment can fluctuate dramatically from period-to-period due to many factors including unpredictable funding, deployment and technology decisions by the U.S. government. In addition, our new MTS and BFT contracts are indefinite delivery/indefinite quantity contracts (“IDIQ”), and as such, the U.S. Army is not obligated to purchase any equipment or services under the contracts. Based on our current backlog and expected new MTS and BFT contract orders and the expected timely receipt of certain components by the U.S. government that are provided to us for incorporation into our mobile satellite transceivers, we currently anticipate that our mobile data communications segment’s annual sales will grow in fiscal 2008 as compared to fiscal 2007. We currently expect sales for the three months ending January 31, 2008 to be a peak quarter for fiscal 2008 as we expect to ship against a significant amount of orders that we received during the three months ended October 31, 2007, including previously announced orders from the Army National Guard. Net sales in our RF microwave amplifiers segment were $13.2 million for the three months ended October 31, 2007 compared to $9.4 million for the three months ended October 31, 2006, an increase of $3.8 million, or 40.4%. The increase in net sales was primarily due to higher sales of our amplifiers and high-power switches that are incorporated into defense-related systems, including sales associated with our participation in the Counter Remote-Control Improvised Explosive Device Electronic Warfare 2.1 program (“CREW 2.1”). Our RF microwave amplifiers segment represented 11.5% of consolidated net sales for the three months ended October 31, 2007 as compared to 9.7% for the three months ended October 31, 2006. Based on the amount of our current backlog and anticipated future orders, we currently expect annual sales in our RF microwave amplifiers segment, including sales of amplifiers and high-power switches related to our participation in the CREW 2.1 program, to increase in fiscal 2008 as compared to fiscal 2007.

24

| International sales
(which include sales to U.S. companies for inclusion in products which are
sold to international customers) represented 30.6% and 29.4% of
consolidated net sales for the three months ended October 31, 2007 and
2006, respectively. Domestic commercial sales represented 8.8% and 14.3% of
consolidated net sales for the three months ended October 31, 2007 and
2006, respectively. Sales to the U.S. government (including sales to prime
contractors of the U.S. government) represented 60.6% and 56.3% of
consolidated net sales for the three months ended October 31, 2007 and
2006, respectively. |
| --- |
| Gross Profit. Gross profit was $50.5 million and $39.4 million for the
three months ended October 31, 2007 and 2006, respectively. The increase in
gross profit was primarily attributable to the increase in net sales
discussed above, as well as an increase in the gross profit percentage to
43.9% for the three months ended October 31, 2007 from 40.6% for three
months ended October 31, 2006. Excluding the impact of a favorable
cumulative adjustment of $1.1 million relating to our original MTS
contract, our gross profit as a percentage of sales for the three months
ended October 31, 2006 would have been 39.9%. |
| The increase in the
gross profit percentage noted above was driven by increased gross margins
in our mobile data communications and telecommunications transmission
segments, partially offset by lower gross margins in our RF microwave
amplifiers segment. The increase in gross margins in our mobile data
communications segment was primarily the result of increased operating
efficiencies relating to deliveries of orders placed under our new MTS and
BFT contracts and a more favorable product mix during the three months
ended October 31, 2007 as compared to the three months ended October 31,
2006. Our telecommunications transmission segment experienced higher gross
margins as it benefited from increased usage of our high-volume technology
manufacturing center, as well as a higher proportion of sales of satellite
earth stations products, which typically realize higher gross margins than
our over-the-horizon microwave systems. Our RF microwave amplifiers segment
experienced lower gross margins due to long production times associated
with certain complex amplifiers that employ newer technology. |
| Included in cost of
sales for the three months ended October 31, 2007 and 2006 are
provisions for excess and obsolete inventory of $0.5 million and $0.6
million, respectively. As discussed in our “Critical Accounting
Policies – Provisions for Excess and Obsolete Inventory,” we
regularly review our inventory and record a provision for excess and
obsolete inventory based on historical and projected usage
assumptions. |
| Selling, General
and Administrative Expenses. Selling, general and administrative
expenses were $20.4 million and $16.6 million for the three months ended
October 31, 2007 and 2006, respectively, representing an increase of $3.8
million, or 22.9%. The increase in expenses was primarily attributable to
an increase in costs (including legal and other
professional service fees) associated with the matters
discussed in “Notes to Condensed Consolidated Financial Statements
– Note (15) Legal Proceedings” and higher payroll-related expenses (including the amortization of stock-based compensation). |
| As a percentage of
consolidated net sales, selling, general and administrative expenses were
17.7% and 17.1% for the three months ended October 31, 2007 and 2006,
respectively. We expect selling, general and administrative expenses, as a
percentage of consolidated net sales, to decrease during the remainder of
the fiscal year due to the anticipated increase in fiscal 2008 sales, as
discussed above. The percentage for the full fiscal year 2008 is expected
to be similar to fiscal 2007. |
| Amortization of
stock-based compensation expense recorded as selling, general and
administrative expenses increased to $2.0 million in the three months ended
October 31, 2007 from $1.4 million in the three months ended October 31,
2006. |
| Research and
Development Expenses. Research and development expenses were $11.0
million and $7.2 million for the three months ended October 31, 2007 and
2006, respectively, representing an increase of $3.8 million, or 52.8%. The
increase in expenses primarily reflects our continued investment in
research and development efforts across all of our business segments. As a
percentage of consolidated net sales, research and development expenses
were 9.6% and 7.4% for the three months ended October 31, 2007 and 2006,
respectively. |
| For the three months
ended October 31, 2007 and 2006, research and development expenses of
approximately $6.1 million and $4.9 million, respectively, related to our
telecommunications transmission segment, $3.5 million and $1.3 million,
respectively, related to our mobile data communications segment, $0.9
million and $0.8 million, respectively, related to our RF microwave
amplifiers segment, with the remaining expenses related to the amortization
of stock-based compensation expense which is not allocated to our three
operating segments. Amortization of stock-based compensation expense
recorded as research and development expenses increased to $0.5 million in
the three months ended October 31, 2007 from $0.2 million in the three
months ended October 31, 2006. |

25

As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended October 31, 2007 and 2006, customers reimbursed us $0.7 million and $1.8 million, respectively, which is not reflected in the reported research and development expenses, but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles. Amortization of intangibles for the three months ended October 31, 2007 and 2006 was $0.4 million and $0.6 million, respectively. The amortization primarily relates to intangibles with finite lives that we acquired in connection with various acquisitions. Operating Income. Operating income for the three months ended October 31, 2007 and 2006 was $18.7 million and $15.0 million, respectively. The $3.7 million, or 24.7% increase, was primarily the result of the higher consolidated sales and gross margins during the three months ended October 31, 2007, partially offset by increased operating expenses as discussed above. Operating income in our telecommunications transmission segment decreased to $10.9 million for the three months ended October 31, 2007 from $12.9 million for the three months ended October 31, 2006, as a result of lower net sales, as discussed above, and increased operating expenses, partially offset by increased gross margins. Our mobile data communications segment generated operating income of $12.8 million for the three months ended October 31, 2007 compared to $6.1 million for the three months ended October 31, 2006. The increase in operating income was primarily due to the increase in net sales, operating efficiencies achieved and a favorable product mix during the quarter, partially offset by increased spending on research and development activities. As discussed above under “ Gross Profit ,” included in operating income for the three months ended October 31, 2006, is a positive impact from the cumulative adjustment related to our original MTS contract with the U.S. Army of $1.0 million. Operating income in our RF microwave amplifiers segment increased to $1.0 million for the three months ended October 31, 2007 from $0.9 million for the three months ended October 31, 2006 due primarily to increased net sales partially offset by lower gross margins, as discussed above, and our increased spending on research and development activities. Unallocated operating expenses increased to $6.0 million for the three months ended October 31, 2007 from $4.9 million for the three months ended October 31, 2006 due to higher payroll-related expenses (primarily increased amortization of stock-based compensation), as well as increased other costs associated with growing our business. Amortization of stock-based compensation expense increased to $2.7 million in the three months ended October 31, 2007 from $1.8 million in the three months ended October 31, 2006. This increase is primarily attributable to an increase in both the number and related fair value of stock-based awards that are being amortized over their respective service periods for the three months ended October 31, 2007 as compared to the three months ended October 31, 2006. Interest Expense. Interest expense was $0.7 million for both the three months ended October 31, 2007 and 2006. Interest expense primarily relates to our 2.0% convertible senior notes. Interest Income and Other. Interest income and other for the three months ended October 31, 2007 was $4.4 million, as compared to $3.2 million for the three months ended October 31, 2006. The $1.2 million increase was primarily due to an increase in investable cash since October 31, 2006, partially offset by a slight decline in interest rates. Provision for Income Taxes. The provision for income taxes was $7.7 million and $6.6 million for the three months ended October 31, 2007 and 2006, respectively. Our effective tax rate was 34.5% and 38.0% for the three months ended October 31, 2007 and 2006, respectively. The decrease in the effective tax rate was primarily attributable to (i) the passage of legislation extending the Federal research and experimentation credit through December 2007, (ii) anticipated deductions associated with cash incentive awards expected to be paid under our 2000 Stock Incentive Plan without limitation under §162(m) of the Internal Revenue Code, and (iii) the scheduled phase-in of the deduction for domestic production activities, offset by the repeal of the extraterritorial income exclusion. In addition, we recorded a discrete tax benefit of approximately $0.1 million for the three months ended October 31, 2007 relating to disqualifying dispositions of incentive stock options. Excluding discrete items, we currently expect that our effective tax rate for fiscal 2008 will approximate 34.75%.

26

Our Federal income tax return for the fiscal year ended July 31, 2004 is currently being audited by the Internal Revenue Service. Additional income tax returns for other fiscal years may also be examined. If the outcome of the audit differs materially from our original income tax provisions, it could have a material adverse effect on our results of operations and financial condition. LIQUIDITY AND CAPITAL RESOURCES Our unrestricted cash and cash equivalents decreased to $333.4 million for the three months ended October 31, 2007 from $342.9 million at July 31, 2007. Net cash used in operating activities was $9.7 million for the three months ended October 31, 2007 compared to $3.6 million of net cash used in operating activities for the three months ended October 31, 2006. Net cash used during the three months ended October 31, 2007 primarily reflects a significant increase in accounts receivable due to the timing of shipments in the first quarter of fiscal 2008 to our customers (primarily the U.S. government), a buildup of inventory anticipated to be shipped throughout fiscal 2008, payment of fiscal 2007 incentive compensation awards and the net impact of normal changes in other working capital accounts, primarily associated with timing. Net cash used in investing activities for the three months ended October 31, 2007 was $3.6 million, of which $3.2 million was for purchases of property, plant and equipment including expenditures related to the continued expansion of our high-volume technology manufacturing center located in Tempe, Arizona. Net cash provided by financing activities was $3.9 million for the three months ended October 31, 2007, primarily due to the exercises of stock-based awards, including the related income tax benefit. FINANCING ARRANGEMENT On January 27, 2004, we issued $105.0 million of our 2.0% convertible senior notes in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. For further information concerning this financing, see “Notes to Consolidated Financial Statements – Note 9 - 2.0% Convertible Senior Notes due 2024 .” COMMITMENTS In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of October 31, 2007, will materially adversely affect our liquidity. At October 31, 2007, we had contractual cash obligations to repay our 2.0% convertible senior notes, operating lease obligations (including satellite lease expenditures relating to our mobile data communications segment contracts) and the financing of a purchase of proprietary technology. Payments due under these long-term obligations, excluding interest on the 2.0% convertible senior notes, are as follows:

| | Obligations
Due by Fiscal Years (in thousands) | Remainder of | 2009 and | 2011 and | After |
| --- | --- | --- | --- | --- | --- |
| | Total | 2008 | 2010 | 2012 | 2012 |
| 2.0%
convertible senior notes | $ 105,000 | — | — | — | 105,000 |
| Operating
lease commitments | 16,571 | 6,618 | 6,455 | 3,092 | 406 |
| Other
obligations | 225 | 112 | 113 | — | — |
| Total
contractual cash obligations | $ 121,796 | 6,730 | 6,568 | 3,092 | 105,406 |

27

| As further discussed in “Notes to Condensed Consolidated Financial Statements – Note
(9) - 2.0% Convertible Senior Notes due 2024, ” we may, at our
option, redeem some or all of the notes on or after February 4, 2009.
Holders of our 2.0% convertible senior notes will have the right to require
us to repurchase some or all of the outstanding notes on February 1, 2011,
February 1, 2014 and February 1, 2019 and upon certain events. The notes
can be converted, at the option of the noteholders, during the conversion
period of September 17, 2007 through December 14, 2007. On the basis of the
closing sale prices of our common stock through December 3,
2007, we also anticipate that the notes will be convertible
during the conversion period of December 17, 2007 through March 14,
2008. Upon receiving notification of a noteholder’s intent to convert, we, in
accordance with the provisions of the indenture, will inform the noteholder
of our intention to deliver shares of common stock or cash, or a
combination thereof. |
| --- |
| We have entered into
standby letter of credit agreements with financial institutions relating to
the guarantee of future performance on certain contracts. At October 31,
2007, the balance of these agreements was $5.2 million. |
| We believe that our
cash and cash equivalents will be sufficient to meet our operating cash
requirements for the foreseeable future. In the event that we identify a
significant acquisition that requires additional cash, we would seek to
borrow funds or raise additional equity capital. |
| RECENT ACCOUNTING
PRONOUNCEMENTS |
| On August 1, 2007, we
adopted the provisions of FIN No. 48. Except for additional disclosures
which are contained in “Notes to Condensed Consolidated Financial
Statements – Note (10) Income Taxes,” there was no
material impact on our financial statements and we did not record any
cumulative-effect adjustment to the opening balance of retained earnings.
In accordance with FIN No. 48, there was no retrospective application to
any prior financial statement periods. |
| In February 2007, the
FASB released SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”) to
provide companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS No. 159 is to reduce both
the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently.
SFAS No. 159 is effective as of the beginning of our fiscal 2009. Early
adoption is permitted. We are currently evaluating SFAS No. 159 and are not
yet in a position to determine what, if any, effect SFAS No. 159 will have
on our consolidated financial statements. |
| In September 2006, the
FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”) to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures
on fair value measurements. SFAS No. 157 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
SFAS No. 157 also stipulates that, as a market-based measurement, fair
value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a
fair value hierarchy that distinguishes between (a) market participant
assumptions developed based on market data obtained from sources
independent of the reporting entity (observable inputs) and (b) the
reporting entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (unobservable inputs). Except for the deferral for the
implementation of SFAS No. 157 for other non-financial assets and
liabilities, as defined, SFAS No. 157 will be effective for our first
quarter of fiscal 2009. The FASB is expected to continue to further debate
the aspects of SFAS No. 157 that relate to non-financial assets and
liabilities and the aforementioned accounting could change. We are
currently evaluating SFAS No. 157 and are not yet in a position to
determine what, if any, effect SFAS No. 157 will have on our consolidated
financial statements. |
| Item 3. Quantitative and Qualitative Disclosures about
Market Risk |
| Our earnings and cash
flows are subject to fluctuations due to changes in interest rates
primarily from our investment of available cash balances. Under our current
policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. If the interest rate we receive on our
investment of available cash balances were to change by 10%, our annual
interest income would be impacted by approximately $1.7 million. |
| Our 2.0% convertible
senior notes bear a fixed rate of interest. As such, our earnings and cash
flows are not sensitive to changes in interest rates on our long-term debt.
As of October 31, 2007, we estimate the fair market value of our 2.0%
convertible senior notes to be $184.5 million based on recent trading
activity. |

28

| Item 4. Controls and Procedures |
| --- |
| As of the end of the
period covered by this Quarterly Report on Form 10-Q, an evaluation of the
effectiveness of the design and operation of the Company’s disclosure
controls and procedures was carried out by the Company under the
supervision and with the participation of the Company’s management,
including the Chief Executive Officer and Chief Financial Officer. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures have
been designed and are being operated in a manner that provides reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. A system of controls, no
matter how well designed and operated, cannot provide absolute assurance
that the objectives of the system of controls are met, and no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected. There have
been no changes in the Company’s internal controls over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting. |
| PART
II OTHER INFORMATION |
| Item
1. Legal Proceedings |
| See “Notes to
Condensed Consolidated Financial Statements – Note (15) Legal
Proceedings,” in Part I, Item 1 of this Form 10-Q for information
regarding legal proceedings. |
| Item 1A. Risk Factors |
| There have been no
material changes from the risk factors previously disclosed in the
Company’s Form 10-K for the fiscal year ended July 31, 2007, except
as discussed below. |
| We could be
adversely affected by the results of an ongoing investigation into our
contract to supply certain equipment to the Brazilian
Government. |
| In October
2007, our Florida-based subsidiary, Comtech Systems, Inc.
(“CSI”), received a customs export enforcement subpoena from
the U.S. Immigration and Customs Enforcement (“ICE”) branch of
the Department of Homeland Security. The subpoena relates to CSI’s
$1.98 million contract with the Brazilian Naval Commission (“the
Brazil contract”) and it required the production of all books,
records and documents, including copies of contracts, invoices and payments
related to agreements between CSI, its agent, its subcontractor and the
Brazilian government. We believe that the ICE investigation is focused
primarily on whether or not CSI was in compliance with export-related laws
and regulations, including the International Traffic in Arms Regulations
and the Export Administration Regulations. CSI produced documents in
response to the subpoena request in November 2007 and will continue to
provide related information to ICE. We believe that CSI made a good
faith effort to comply with applicable regulations. Customs officials have
detained certain inventory related to the Brazil contract pending
resolution of this matter. |
| We engaged outside
counsel to assist CSI in its response to the subpoena and related
matters, conduct our own investigation, and to assess and improve, as appropriate, internal controls
at CSI with respect to U.S. export control laws and regulations and laws
governing record keeping and dealings with foreign representatives. To
date, we have noted opportunities for improving our procedures for
ensuring compliance with such laws and regulations. We expect our
assessment process and any necessary remediation of internal controls to be
completed by the end of fiscal 2008. |
| Violations of U.S.
export control related laws and regulations that are identified by the U.S.
government could result in civil or criminal fines and/or penalties and/or result in an injuction against CSI, all of which could, in the aggregate,
materially impact our business, results of operations and cash flows.
Should we identify a material weakness relating to our compliance, the
ongoing costs of remediation could be material. In addition, inventory
related to the Brazil contract (including the inventory that has
been detained) had a net book value of $1.1 million as of October 31, 2007.
If this inventory is permanently seized or not returned to us timely, or we
can not resell the inventory to other customers, we would be required to
write-off the value of this inventory in a future accounting period. |

29

Item 6. Exhibits (a) Exhibits

| Exhibit 10 - Amendment
No. 1 to the Amended and Restated Comtech Telecommunications Corp. 2000 Stock Incentive Plan |
| --- |
| Exhibit
31.1 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
| Exhibit
31.2 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
| Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

30

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. (Registrant)

| Date: December
5, 2007 |
| --- |
| Fred Kornberg |
| Chairman of the
Board |
| Chief Executive Officer and
President |
| (Principal Executive
Officer) |

| Date: December
5, 2007 |
| --- |
| Michael D.
Porcelain |
| Senior Vice President
and |
| Chief Financial
Officer |
| (Principal Financial
and Accounting Officer) |

31