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

10-Q 1 d73806_10-q.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 January 31, 2008 | |
| 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)

Delaware	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 February 29, 2008, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 24,213,640 shares.

COMTECH TELECOMMUNICATIONS CORP. INDEX

| PART
I. | FINANCIAL
INFORMATION | Page |
| --- | --- | --- |
| Item
1. | Condensed
Consolidated Financial Statements | |
| | Condensed
Consolidated Balance Sheets – January 31, 2008 (Unaudited) and July
31, 2007 | 2 |
| | Condensed
Consolidated Statements of Operations – Three and Six Months Ended
January 31, 2008 and 2007 (Unaudited) | 3 |
| | Condensed
Consolidated Statements of Cash Flows – Six Months Ended January 31,
2008 and 2007 (Unaudited) | 4 |
| | Notes to
Condensed Consolidated Financial Statements | 5 |
| Item
2. | Management’s
Discussion and Analysis of Financial Condition and Results of
Operations | 23 |
| Item
3. | Quantitative
and Qualitative Disclosures about Market Risk | 35 |
| Item
4. | Controls
and Procedures | 35 |
| PART
II. | OTHER
INFORMATION | |
| Item
1. | Legal
Proceedings | 35 |
| Item 1A. | Risk
Factors | 35 |
| Item
6. | Exhibits | 36 |
| Signature
Page | | 37 |

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

| Item
1. | January 31, 2008 | | | |
| --- | --- | --- | --- | --- |
| | (Unaudited) | | | |
| Assets | | | | |
| Current
assets: | | | | |
| Cash and cash
equivalents | $ 340,938,000 | | 342,903,000 | |
| Accounts receivable,
net | 112,376,000 | | 73,585,000 | |
| Inventories,
net | 77,743,000 | | 61,987,000 | |
| Prepaid expenses and
other current assets | 7,246,000 | | 6,734,000 | |
| Deferred tax asset
– current | 9,657,000 | | 9,380,000 | |
| Total current
assets | 547,960,000 | | 494,589,000 | |
| Property, plant and
equipment, net | 31,297,000 | | 29,282,000 | |
| Goodwill | 24,363,000 | | 24,387,000 | |
| Intangibles with finite
lives, net | 5,823,000 | | 5,717,000 | |
| Deferred financing
costs, net | 1,630,000 | | 1,903,000 | |
| Other assets,
net | 395,000 | | 464,000 | |
| Total assets | $ 611,468,000 | | 556,342,000 | |
| Liabilities and
Stockholders’ Equity | | | | |
| Current
liabilities: | | | | |
| Accounts
payable | $ 27,920,000 | | 26,137,000 | |
| Accrued expenses and
other current liabilities | 43,142,000 | | 47,332,000 | |
| Customer advances and
deposits | 24,066,000 | | 20,056,000 | |
| Current installments of
other obligations | 140,000 | | 135,000 | |
| Interest
payable | 1,050,000 | | 1,050,000 | |
| Income taxes payable
– current | 1,819,000 | | 2,796,000 | |
| Total current
liabilities | 98,137,000 | | 97,506,000 | |
| Convertible senior
notes | 105,000,000 | | 105,000,000 | |
| Other obligations, less
current installments | 37,000 | | 108,000 | |
| Income taxes payable
– non-current | 3,018,000 | | — | |
| Deferred tax liability
– non-current | 8,140,000 | | 7,960,000 | |
| Total
liabilities | 214,332,000 | | 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 24,424,127 shares and
24,016,329 shares at January 31, 2008 and July 31, 2007,
respectively | 2,442,000 | | 2,402,000 | |
| Additional paid-in
capital | 176,868,000 | | 165,703,000 | |
| Retained
earnings | 218,011,000 | | 177,848,000 | |
| | 397,321,000 | | 345,953,000 | |
| Less: | | | | |
| Treasury stock (210,937
shares) | (185,000 | ) | (185,000 | ) |
| Total
stockholders’ equity | 397,136,000 | | 345,768,000 | |
| Total liabilities and
stockholders’ equity | $ 611,468,000 | | 556,342,000 | |

See accompanying notes to condensed consolidated financial statements.

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

| | Three
months ended January 31, — 2008 | 2007 | | 2008 | | 2007 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Net sales | $ 152,030,000 | | 111,383,000 | | 267,085,000 | | 208,453,000 | |
| Cost of
sales | 85,705,000 | | 61,533,000 | | 150,282,000 | | 119,228,000 | |
| Gross profit | 66,325,000 | | 49,850,000 | | 116,803,000 | | 89,225,000 | |
| Expenses: | | | | | | | | |
| Selling, general and
administrative | 21,304,000 | | 18,257,000 | | 41,703,000 | | 34,844,000 | |
| Research and
development | 9,140,000 | | 7,616,000 | | 20,181,000 | | 14,773,000 | |
| Amortization of
intangibles | 434,000 | | 679,000 | | 813,000 | | 1,328,000 | |
| | 30,878,000 | | 26,552,000 | | 62,697,000 | | 50,945,000 | |
| Operating
income | 35,447,000 | | 23,298,000 | | 54,106,000 | | 38,280,000 | |
| Other expenses
(income): | | | | | | | | |
| Interest
expense | 670,000 | | 672,000 | | 1,347,000 | | 1,367,000 | |
| Interest income and
other | (4,095,000 | ) | (3,315,000 | ) | (8,542,000 | ) | (6,490,000 | ) |
| Income before provision
for income taxes | 38,872,000 | | 25,941,000 | | 61,301,000 | | 43,403,000 | |
| Provision for income
taxes | 13,403,000 | | 7,770,000 | | 21,138,000 | | 14,405,000 | |
| Net income | $ 25,469,000 | | 18,171,000 | | 40,163,000 | | 28,998,000 | |
| Net income per share
(See Note 4): | | | | | | | | |
| Basic | $ 1.06 | | 0.79 | | 1.67 | | 1.26 | |
| Diluted | $ 0.91 | | 0.68 | | 1.45 | | 1.09 | |
| Weighted average number
of common shares outstanding – basic | 24,099,000 | | 23,095,000 | | 24,012,000 | | 23,022,000 | |
| Weighted average number
of common and common equivalent shares outstanding assuming dilution
– diluted | 28,303,000 | | 27,491,000 | | 28,256,000 | | 27,440,000 | |

See accompanying notes to condensed consolidated financial statements.

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

| | Six
months ended January 31, — 2008 | 2007 | | |
| --- | --- | --- | --- | --- |
| Cash flows from
operating activities: | | | | |
| Net income | $ 40,163,000 | | 28,998,000 | |
| Adjustments to
reconcile net income to net cash (used in) provided by
operating activities: | | | | |
| Depreciation and
amortization of property, plant and equipment | 4,371,000 | | 3,558,000 | |
| Amortization of
intangible assets with finite lives | 813,000 | | 1,328,000 | |
| Amortization of
stock-based compensation | 5,271,000 | | 3,347,000 | |
| Amortization of
deferred financing costs | 273,000 | | 273,000 | |
| Gain on disposal of
property, plant and equipment | — | | (2,000 | ) |
| (Benefit from)
provision for allowance for doubtful accounts | (5,000 | ) | 18,000 | |
| Provision for excess
and obsolete inventory | 1,236,000 | | 1,549,000 | |
| Excess income tax
benefit from stock award exercises | (1,523,000 | ) | (1,855,000 | ) |
| Deferred income tax
benefit | (97,000 | ) | (340,000 | ) |
| Changes in assets and
liabilities, net of effects of acquisitions: | | | | |
| Restricted cash
securing letter of credit obligations | — | | 1,003,000 | |
| Accounts
receivable | (38,786,000 | ) | 1,329,000 | |
| Inventories | (16,883,000 | ) | (14,004,000 | ) |
| Prepaid expenses and
other current assets | (1,313,000 | ) | 1,502,000 | |
| Other assets | 69,000 | | 106,000 | |
| Accounts
payable | 1,858,000 | | (8,784,000 | ) |
| Accrued expenses and
other current liabilities | (3,986,000 | ) | (3,717,000 | ) |
| Customer advances and
deposits | 4,010,000 | | 5,603,000 | |
| Deferred service
revenue | — | | (4,990,000 | ) |
| Income taxes
payable | 3,564,000 | | 2,292,000 | |
| Net cash (used in)
provided by operating activities | (965,000 | ) | 17,214,000 | |
| Cash flows from
investing activities: | | | | |
| Purchases of property,
plant and equipment | (6,386,000 | ) | (4,870,000 | ) |
| Purchases of other
intangibles with finite lives | (193,000 | ) | — | |
| Payments for business
acquisition | (265,000 | ) | (2,614,000 | ) |
| Net cash used in
investing activities | (6,844,000 | ) | (7,484,000 | ) |
| Cash flows from
financing activities: | | | | |
| Principal payments on
other obligations | (66,000 | ) | (91,000 | ) |
| Excess income tax
benefit from stock award exercises | 1,523,000 | | 1,855,000 | |
| Proceeds from exercises
of stock options | 3,939,000 | | 2,770,000 | |
| Proceeds from issuance
of employee stock purchase plan shares | 448,000 | | 363,000 | |
| Net cash provided by
financing activities | 5,844,000 | | 4,897,000 | |
| Net (decrease) increase
in cash and cash equivalents | (1,965,000 | ) | 14,627,000 | |
| Cash and cash
equivalents at beginning of period | 342,903,000 | | 251,587,000 | |
| Cash and cash
equivalents at end of period | $ 340,938,000 | | 266,214,000 | |
| Supplemental cash
flow disclosures: | | | | |
| Cash paid during the
period for: | | | | |
| Interest | $ 1,068,000 | | 1,073,000 | |
| Income taxes | $ 17,881,000 | | 12,055,000 | |
| Noncash investing
activities: | | | | |
| Accrued business
acquisition payments | $ — | | 613,000 | |

See accompanying notes to condensed consolidated financial statements.

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES N OTES 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 and six months ended January 31, 2008 and 2007 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 and six months ended January 31, 2008 and 2007,
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)	Stock-Based
Compensation
	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 January 31, — 2008 | 2007 | | 2008 | | 2007 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cost of
sales | $ 106,000 | | 122,000 | | 327,000 | | 262,000 | |
| Selling, general and
administrative expenses | 2,023,000 | | 1,188,000 | | 4,043,000 | | 2,609,000 | |
| Research and
development expenses | 423,000 | | 227,000 | | 901,000 | | 476,000 | |
| Stock-based
compensation expense before income tax benefit | 2,552,000 | | 1,537,000 | | 5,271,000 | | 3,347,000 | |
| Income tax
benefit | (888,000 | ) | (579,000 | ) | (1,829,000 | ) | (1,074,000 | ) |
| Net stock-based
compensation expense | $ 1,664,000 | | 958,000 | | 3,442,000 | | 2,273,000 | |

| Of
the total stock-based compensation expense before income tax benefit
recognized in the three months ended January 31, 2008 and 2007, $54,000 and
$41,000, respectively, related to awards issued pursuant to the ESPP. Of
the total stock-based compensation expense before income tax benefit
recognized in the six months ended January 31, 2008 and 2007, $105,000 and
$83,000, respectively, related to awards issued pursuant to the
ESPP. |
| --- |
| Included in total
stock-based compensation expense before income tax benefit recognized in
the three months ended January 31, 2008 is a benefit of $4,000 as a result
of the required fair value remeasurement of the Company’s
liability-classified stock appreciation rights (“SARs”) at the
end of the reporting period. Of the total stock-based compensation expense
before income tax benefit recognized in the six months ended January 31,
2008, $85,000 related to awards of SARs. There were no SARs outstanding in
the three or six month periods ended January 31, 2007. |
| Stock-based
compensation that was capitalized and included in ending inventory at
January 31, 2008 and July 31, 2007 was $215,000 and $106,000,
respectively. |
| 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 January 31, 2008 and 2007
approximated $17.43 and $13.79, respectively. The per share weighted
average grant-date fair value of stock-based awards granted during the six
months ended January 31, 2008 and 2007 approximated $15.73 and $10.68,
respectively. In addition to the exercise and grant-date prices of the
awards, certain weighted average assumptions that were used to estimate the
initial fair value of stock-based awards in the respective periods are
listed in the table below: |

| | Three
months ended January 31, — 2008 | 2007 | Six
months ended January 31, — 2008 | 2007 |
| --- | --- | --- | --- | --- |
| Expected dividend
yield | 0 % | 0 % | 0 % | 0 % |
| Expected
volatility | 42.43 % | 45.47 % | 43.11 % | 45.47 % |
| Risk-free interest
rate | 2.91 % | 4.48 % | 4.54 % | 4.89 % |
| Expected life
(years) | 3.41 | 3.63 | 3.55 | 3.63 |

| Stock-based awards
granted during the three and six months ended January 31, 2008 and 2007
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 January 31, 2008 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
awards 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:

| | Six
months ended January 31, — 2008 | 2007 | | |
| --- | --- | --- | --- | --- |
| Actual income tax
benefit recorded for the tax deductions relating to the exercise of
stock-based awards | $ 2,088,000 | | 2,098,000 | |
| Less: Tax benefit
initially recognized on exercised stock-based awards vesting subsequent to
the adoption of SFAS No. 123(R) | (565,000 | ) | (139,000 | ) |
| Excess income tax
benefit recorded as an increase to additional paid-in capital | 1,523,000 | | 1,959,000 | |
| 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) | — | | (104,000 | ) |
| 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 | $ 1,523,000 | | 1,855,000 | |

| | At
January 31, 2008, total remaining unrecognized compensation cost related to
unvested stock-based awards was $15,466,000, net of estimated forfeitures
of $1,099,000. The net cost is expected to be recognized over a weighted
average period of 1.9 years. |
| --- | --- |
| (4) | Earnings Per
Share |
| | 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 586,000 and 697,000 shares for the three months ended January 31,
2008 and 2007, respectively, were not included in the EPS calculation
because their effect would have been anti-dilutive. Equity-classified
stock-based awards to purchase 588,000 and 1,035,000 shares for the six
months ended January 31, 2008 and 2007, respectively, were not included in
the 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 January 31, — 2008 | 2007 | Six
months ended January 31, — 2008 | 2007 |
| --- | --- | --- | --- | --- |
| Numerator: | | | | |
| Net income for basic
calculation | $ 25,469,000 | 18,171,000 | 40,163,000 | 28,998,000 |
| Effect of dilutive
securities: | | | | |
| Interest expense (net
of tax) on convertible senior notes | 417,000 | 417,000 | 833,000 | 833,000 |
| Numerator for diluted
calculation | $ 25,886,000 | 18,588,000 | 40,996,000 | 29,831,000 |
| Denominator: | | | | |
| Denominator for basic
calculation | 24,099,000 | 23,095,000 | 24,012,000 | 23,022,000 |
| Effect of dilutive
securities: | | | | |
| Stock
options | 871,000 | 1,063,000 | 911,000 | 1,085,000 |
| Conversion of
convertible senior notes | 3,333,000 | 3,333,000 | 3,333,000 | 3,333,000 |
| Denominator for diluted
calculation | 28,303,000 | 27,491,000 | 28,256,000 | 27,440,000 |

| (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 Monitoring 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 have not been material to the
Company’s results of operations. 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 have not been material
to the Company’s results of operations. This operation was combined,
in February 2007, with the Company’s existing business and is part of
the telecommunications transmission segment. |
| The
Company allocated the purchase price of these acquisitions as
follows: |

| Fair value of net
tangible assets acquired | Insite — $ 335,000 | 408,000 | |
| --- | --- | --- | --- |
| 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
consist of the following:

| Amounts receivable from
the U.S. government and its agencies | $ 74,827,000 | July
31, 2007 — 38,773,000 |
| --- | --- | --- |
| Accounts receivable
from commercial customers | 32,319,000 | 33,859,000 |
| Unbilled receivables on
contracts-in-progress | 5,863,000 | 1,638,000 |
| | 113,009,000 | 74,270,000 |
| Less allowance for
doubtful accounts | 633,000 | 685,000 |
| Accounts receivable,
net | $ 112,376,000 | 73,585,000 |

| | Unbilled receivables on
contracts-in-progress include $4,326,000 and $1,308,000 at January 31, 2008
and July 31, 2007, respectively, due from the U.S. government and its
agencies. There was no retainage included in unbilled receivables at
January 31, 2008 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 | $ 39,996,000 | July
31, 2007 — 32,669,000 |
| --- | --- | --- |
| Work-in-process and
finished goods | 46,267,000 | 37,822,000 |
| | 86,263,000 | 70,491,000 |
| Less reserve for excess
and obsolete inventories | 8,520,000 | 8,504,000 |
| Inventories,
net | $ 77,743,000 | 61,987,000 |

| | Inventories directly
related to long-term contracts, including the Company’s contracts for
the U.S. Army’s Movement Tracking System (“MTS”) and the
U.S. Army’s Force XXI Battle Command, Brigade and Below command and
control systems (also known as Blue Force Tracking (“BFT”)),
were $23,651,000 and $6,547,000 at January 31, 2008 and July 31, 2007,
respectively. At January 31, 2008 and July 31, 2007, $1,461,000 and
$2,286,000, respectively, of the inventory balance above related to
contracts from third party commercial customers to outsource their
manufacturing. |
| --- | --- |
| (8) | Accrued
Expenses |
| | Accrued expenses and
other current liabilities consist of the following: |

| Accrued wages and
benefits | $ 15,596,000 | July
31, 2007 — 20,695,000 |
| --- | --- | --- |
| Accrued warranty
obligations | 11,503,000 | 9,685,000 |
| Accrued commissions and
royalties | 8,415,000 | 6,751,000 |
| Accrued business
acquisition payments | — | 290,000 |
| Other | 7,628,000 | 9,911,000 |
| Accrued expenses and
other current liabilities | $ 43,142,000 | 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 six months ended January 31, 2008 and 2007 were as follows:

2008			2007
Balance at beginning of
period	$ 9,685,000		10,468,000
Provision for warranty
obligations	4,286,000		3,549,000
Reversal of warranty
liability	(156,000	)	(667,000	)
Charges
incurred	(2,312,000	)	(2,786,000	)
Balance at end of
period	$ 11,503,000		10,564,000

| (9) | 2.0% Convertible
Senior Notes due 2024 |
| --- | --- |
| | 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 December 17, 2007 through
March 14, 2008. On the basis of the closing sale prices of the
Company’s common stock through March 3, 2008, the Company also
anticipates that the notes will be convertible during the conversion period
of March 17, 2008 through June 16, 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. |
| | 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) | Income
Taxes |
| | 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 January 31, 2008,
the total unrecognized tax benefits, excluding interest, was $3,955,000 and
$4,131,000, 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, $3,018,000 and $2,801,000, were recorded as non-current income
taxes payable in the Condensed Consolidated Balance Sheets of the Company
at January 31, 2008 and August 1, 2007, respectively. |
| --- | --- |
| | The
Company’s policy is to recognize interest and penalties relating to
uncertain tax positions in income tax expense. At August 1, 2007 and
January 31, 2008, interest accrued relating to income taxes was $462,000
and $539,000, 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. |
| (11) | Stock Option
Plans and Employee Stock Purchase Plan |
| | 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 January 31, 2008, 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 675 are outstanding at January 31, 2008. To date, 2,015,543 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 6,587,500 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. 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
awards may not have a term exceeding ten years or no more than five years
in the case of an incentive stock award granted to a stockholder who owns
stock representing more than 10% of the voting power. |
| | As
of January 31, 2008, the Company had granted stock-based awards
representing the right to purchase an aggregate of 5,418,935 shares (net of
581,365 canceled awards) at prices ranging between $3.13-51.65, of which
2,659,073 are outstanding at January 31, 2008. As of January 31, 2008,
2,759,862 stock-based awards have been exercised. All stock-based awards
granted through January 31, 2008 had exercise prices equal to the fair
market value of the common 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. |

The following table summarizes certain stock option plan activity during the three and six months ended January 31, 2008:

| Outstanding at July
31, 2007 | Number of Shares Underlying Stock-Based Awards — 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 | | |
| Granted | 1,000 | | 51.65 | | |
| Expired/canceled | (5,500 | ) | 26.14 | | |
| Exercised | (182,525 | ) | 4.24 | | |
| Outstanding at
January 31, 2008 | 2,659,748 | $ | 28.02 | 4.29 | $ 44,635,000 |
| Exercisable at
January 31, 2008 | 809,823 | $ | 21.17 | 4.33 | $ 19,140,000 |
| Expected to vest at
January 31, 2008 | 1,792,835 | $ | 30.97 | 4.27 | $ 24,789,000 |

| | Included in the number
of shares underlying stock-based awards outstanding at January 31, 2008, in
the above table, are 26,000 SARs with an aggregate intrinsic value of
$180,000. |
| --- | --- |
| | The
total intrinsic value of stock-based awards exercised during the three
months ended January 31, 2008 and 2007 was $8,862,000 and $1,454,000,
respectively. The total intrinsic value of stock-based awards exercised
during the six months ended January 31, 2008 and 2007 was $16,214,000 and
$6,677,000, 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 the date of issuance through
participation in the payroll-deduction based ESPP. Through the second
quarter of fiscal 2008, the Company issued 271,066 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: |

2008	2007	2008	2007
United
States
U.S.
government	70.6%	58.5%	66.3%	57.5%
Commercial
customers	6.0%	12.9%	7.2%	13.5%
Total United
States	76.6%	71.4%	73.5%	71.0%
International	23.4%	28.6%	26.5%	29.0%

International sales include sales to U.S. domestic companies for inclusion in products that will be sold to international customers. For the three and six months ended January 31, 2008 and 2007, 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. |
| 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. |
| The
telecommunications transmission segment provides sophisticated equipment
and systems, such as satellite earth station equipment (including analog
and digital modems, frequency converters, power amplifiers, and voice
gateways) and over-the-horizon microwave communications products 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. The
telecommunications transmission segment also operates a high-volume
technology manufacturing center that is utilized, in part by the
Company’s two other segments as well as third party commercial
customers who outsource a portion of their manufacturing to the Company. As
such, the telecommunications transmission segment benefits from the related
increased operating efficiencies. |
| The
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. |
| The
RF microwave amplifier segment designs, manufactures, and markets
solid-state, high-power broadband amplifier products and high-power
switches. |
| Unallocated expenses
result from such corporate expenses as legal, accounting and executive
compensation. In addition, for the three and six months ended January 31,
2008, unallocated expenses include $2,552,000 and $5,271,000, respectively,
of stock-based compensation expense and for the three and six months ended
January 31, 2007, unallocated expenses include $1,537,000 and $3,347,000,
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 January 31, 2008 — Telecommunications Transmission | Mobile Data Communications | RF
Microwave Amplifiers | Unallocated | Total | |
| --- | --- | --- | --- | --- | --- | --- |
| Net sales | $ 50,209 | 87,672 | 14,149 | — | $ | 152,030 |
| Operating income
(expense) | 13,228 | 28,313 | 1,048 | (7,142 | ) | 35,447 |
| Interest income and
other | 47 | 11 | — | 4,037 | | 4,095 |
| Interest
expense | 7 | 2 | — | 661 | | 670 |
| Depreciation and
amortization | 1,821 | 534 | 286 | 2,604 | | 5,245 |
| Expenditure for
long-lived assets, including intangibles | 2,402 | 278 | 514 | 13 | | 3,207 |
| Total assets at January
31, 2008 | 130,501 | 84,483 | 43,165 | 353,319 | | 611,468 |

| (in
thousands) | Three
months ended January 31, 2007 — Telecommunications Transmission | Mobile Data Communications | RF
Microwave Amplifiers | Unallocated | Total | |
| --- | --- | --- | --- | --- | --- | --- |
| Net sales | $ 62,569 | 39,728 | 9,086 | — | $ | 111,383 |
| Operating income
(expense) | 19,439 | 8,200 | 817 | (5,158 | ) | 23,298 |
| Interest income and
other | 23 | 7 | — | 3,285 | | 3,315 |
| Interest
expense | 9 | 2 | — | 661 | | 672 |
| Depreciation and
amortization | 1,718 | 353 | 352 | 1,583 | | 4,006 |
| Expenditure for
long-lived assets, including intangibles | 1,344 | 569 | 173 | 11 | | 2,097 |
| Total assets at January
31, 2007 | 138,273 | 39,914 | 29,750 | 274,004 | | 481,941 |
| | Six
months ended January 31, 2008 | | | | | |
| (in
thousands) | Telecommunications Transmission | Mobile Data Communications | RF
Microwave Amplifiers | Unallocated | Total | |
| Net sales | $ 99,061 | 140,718 | 27,306 | — | $ | 267,085 |
| Operating income
(expense) | 24,119 | 41,066 | 2,083 | (13,162 | ) | 54,106 |
| Interest income and
other | 96 | 12 | — | 8,434 | | 8,542 |
| Interest
expense | 13 | 11 | — | 1,323 | | 1,347 |
| Depreciation and
amortization | 3,488 | 1,050 | 545 | 5,372 | | 10,455 |
| Expenditure for
long-lived assets, including intangibles | 5,286 | 753 | 753 | 52 | | 6,844 |
| Total assets at January
31, 2008 | 130,501 | 84,483 | 43,165 | 353,319 | | 611,468 |
| | Six
months ended January 31, 2007 | | | | | |
| (in
thousands) | Telecommunications Transmission | Mobile Data Communications | RF
Microwave Amplifiers | Unallocated | Total | |
| Net sales | $ 114,599 | 75,383 | 18,471 | — | $ | 208,453 |
| Operating income
(expense) | 32,339 | 14,309 | 1,666 | (10,034 | ) | 38,280 |
| Interest income and
other | 49 | 12 | — | 6,429 | | 6,490 |
| Interest
expense | 21 | 24 | — | 1,322 | | 1,367 |
| Depreciation and
amortization | 3,408 | 695 | 691 | 3,439 | | 8,233 |
| Expenditure for
long-lived assets, including intangibles | 3,389 | 3,855 | 489 | 43 | | 7,776 |
| Total assets at January
31, 2007 | 138,273 | 39,914 | 29,750 | 274,004 | | 481,941 |

| Intersegment sales for
the three months ended January 31, 2008 and 2007 by the telecommunications
transmission segment to the mobile data communications segment were
$45,924,000 and $16,331,000, respectively. For the six months ended January
31, 2008 and 2007, intersegment sales by the telecommunications
transmission segment to the mobile data communications segment were
$66,943,000 and $33,736,000, respectively. Intersegment sales have been
eliminated from the tables above. |
| --- |
| For
the three months ended January 31, 2008 and 2007, intersegment sales by the
telecommunications transmission segment to the RF microwave amplifiers
segment were $4,039,000 and $1,727,000, respectively. Intersegment sales
for the six months ended January 31, 2008 and 2007 by the
telecommunications transmission segment to the RF microwave amplifiers
segment were $6,207,000 and $3,568,000, respectively. |

| (14) |
| --- |
| Intangible assets
with finite lives as of January 31, 2008 and July 31, 2007 are as
follows: |

| | January 31,
2008 — Weighted Average Amortization Period | Gross
Carrying Amount | Accumulated Amortization | Net
Carrying Amount |
| --- | --- | --- | --- | --- |
| Existing
technology | 6.94 | $ 13,822,000 | 11,491,000 | $ 2,331,000 |
| Proprietary, core and
licensed technology | 8.31 | 5,851,000 | 2,755,000 | 3,096,000 |
| Other | 5.61 | 975,000 | 579,000 | 396,000 |
| Total | | $ 20,648,000 | 14,825,000 | $ 5,823,000 |

| | July
31, 2007 — 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 January 31, 2008 and 2007 was $434,000 and
$679,000, respectively. Amortization expense for the six months ended
January 31, 2008 and 2007 was $813,000 and $1,328,000, respectively. The
estimated amortization expense for the twelve months ending January 31,
2009, 2010, 2011, 2012 and 2013 is $1,732,000, $1,660,000, $1,395,000,
$708,000 and $181,000, respectively. |
| --- |
| The changes in
carrying amount of goodwill by segment for the six months ended January 31,
2008 are as follows: |

| Balance at July 31,
2007 | Telecommunications Transmission — $ 8,817,000 | Mobile Data Communications — 7,148,000 | | RF
Microwave Amplifiers — 8,422,000 | Total — $ 24,387,000 | |
| --- | --- | --- | --- | --- | --- | --- |
| Acquisition of
Insite | — | (24,000 | ) | — | (24,000 | ) |
| Balance at January
31, 2008 | $ 8,817,000 | 7,124,000 | | 8,422,000 | $ 24,363,000 | |

| (15) |
| --- |
| Brazil
Subpoena |
| 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 (“ITAR”) and the
Export Administration Regulations. CSI has produced documents in response
to the subpoena request and intends to continue to provide related
information to ICE. Customs officials have detained certain inventory
related to the Brazil contract pending resolution of this
matter. |
| Based on its ongoing
investigation into this matter, the Company believes that the detained
inventory, which consists of commercial satellite equipment, was not
modified or adapted in any way to meet Brazilian military requirements and
was only subject to the jurisdiction of the Department of Commerce and not
the jurisdiction of the U.S. Department of State. In addition, in order to
provide certain defense services, including conducting factory acceptance
testing at CSI’s Florida facility, the Company also believes that CSI
was required to obtain a license (referred to as a Technical Assistance
Agreement (“TAA”)) from the U.S. Department of State. The
Company believes the TAA authorized all activities under the Brazil
contract that were subject to the jurisdiction of the U.S. Department of
State. |
| The
Company believes that CSI made a good faith effort to comply with
applicable regulations; however, the Company believes that CSI made
inadvertent administrative errors resulting in a TAA that did not become
effective on a timely basis. The administrative errors relate primarily to
the execution of non-disclosure agreements (“NDA”) with certain
third country national employees of CSI’s agent. These individuals
have now signed appropriate NDAs, and, in December 2007, CSI filed an
amended TAA with the U.S. Department of State. CSI has also requested that
the U.S. Department of State confirm the Company and CSI’s view that
the Brazil contract does not require any other State Department
license. |
| 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 January 31, 2008. 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. Because the ICE investigation and the Company’s
investigation 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. |
| Other Legal
Proceedings |
| Since March 2007, the
Company has been a party to litigation with a company that claimed it was a
consultant and a reseller of certain of the Company’s products and
that it was owed damages for alleged lost profits, as well as punitive
damages, costs and attorney’s fees. In January 2008, the Company
settled the matter. The settlement did not have a material impact on the
Company’s consolidated financial condition or results of operation
for the three or six months ended January 31, 2008. |
| 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. |

| (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. 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 January 31,
2008: |

	Parent							Consolidated Total
Assets
Current
assets:
Cash and cash
equivalents	$ 339,684,000		—	4,445,000		(3,191,000	)	$ 340,938,000
Accounts receivable,
net	—		109,269,000	3,107,000		—		112,376,000
Inventories,
net	—		76,710,000	1,033,000		—		77,743,000
Prepaid expenses and
other current assets	1,282,000		2,691,000	4,076,000		(803,000	)	7,246,000
Deferred tax asset
– current	686,000		8,971,000	—		—		9,657,000
Total current
assets	341,652,000		197,641,000	12,661,000		(3,994,000	)	547,960,000
Property, plant and
equipment, net	795,000		29,805,000	697,000		—		31,297,000
Investment in
subsidiaries	284,634,000		4,423,000	—		(289,057,000	)	—
Goodwill	—		23,416,000	947,000		—		24,363,000
Intangibles with finite
lives, net	—		5,166,000	657,000		—		5,823,000
Deferred tax asset
– non-current	—		—	190,000		(190,000	)	—
Deferred financing
costs, net	1,630,000		—	—		—		1,630,000
Other assets,
net	56,000		321,000	18,000		—		395,000
Intercompany
receivables	—		107,962,000	—		(107,962,000	)	—
Total assets	$ 628,767,000		368,734,000	15,170,000		(401,203,000	)	$ 611,468,000
Liabilities and
Stockholders’ Equity
Current
liabilities:
Accounts
payable	$ 359,000		29,012,000	1,740,000		(3,191,000	)	$ 27,920,000
Accrued expenses and
other current liabilities	6,474,000		35,765,000	903,000		—		43,142,000
Customer advances and
deposits	—		16,114,000	7,952,000		—		24,066,000
Current installments of
other obligations	—		140,000	—		—		140,000
Interest
payable	1,050,000		—	—		—		1,050,000
Income taxes payable
– current	2,622,000		—	—		(803,000	)	1,819,000
Total current
liabilities	10,505,000		81,031,000	10,595,000		(3,994,000	)	98,137,000
Convertible senior
notes	105,000,000		—	—		—		105,000,000
Other obligations, less
current installments	—		37,000	—		—		37,000
Income taxes payable
– non-current	3,018,000		—	—		—		3,018,000
Deferred tax liability
– non-current	5,298,000		3,032,000	—		(190,000	)	8,140,000
Intercompany
payables	107,810,000		—	152,000		(107,962,000	)	—
Total
liabilities	231,631,000		84,100,000	10,747,000		(112,146,000	)	214,332,000
Commitments and
contingencies
Stockholders’
equity:
Preferred
stock	—		—	—		—		—
Common stock	2,442,000		4,000	—		(4,000	)	2,442,000
Additional paid-in
capital	176,868,000		81,410,000	5,187,000		(86,597,000	)	176,868,000
Retained earnings
(deficit)	218,011,000		203,220,000	(764,000	)	(202,456,000	)	218,011,000
	397,321,000		284,634,000	4,423,000		(289,057,000	)	397,321,000
Less:
Treasury
stock	(185,000	)	—	—		—		(185,000	)
Total
stockholders’ equity	397,136,000		284,634,000	4,423,000		(289,057,000	)	397,136,000
Total liabilities and
stockholders’ equity	$ 628,767,000		368,734,000	15,170,000		(401,203,000	)	$ 611,468,000

| (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

| (16) |
| --- |
| The following
reflects the condensed consolidating statement of operations for the three
months ended January 31, 2008: |

Net sales	Parent — $ —		148,511,000		3,639,000		(120,000	)	Consolidated Total — $ 152,030,000
Cost of
sales	—		84,256,000		1,569,000		(120,000	)	85,705,000
Gross profit	—		64,255,000		2,070,000		—		66,325,000
Expenses:
Selling, general and
administrative	—		20,072,000		1,232,000		—		21,304,000
Research and
development	—		8,502,000		638,000		—		9,140,000
Amortization of
intangibles	—		390,000		44,000		—		434,000
	—		28,964,000		1,914,000		—		30,878,000
Operating
income	—		35,291,000		156,000		—		35,447,000
Other expense
(income):
Interest
expense	661,000		9,000		—		—		670,000
Interest income and
other	(4,037,000	)	(41,000	)	(17,000	)	—		(4,095,000	)
Income before income
taxes and equity in undistributed earnings of subsidiaries	3,376,000		35,323,000		173,000		—		38,872,000
Provision for (benefit
from) income taxes	1,249,000		12,185,000		(31,000	)	—		13,403,000
Net earnings before
equity in undistributed earnings of subsidiaries	2,127,000		23,138,000		204,000		—		25,469,000
Equity in undistributed
earnings (loss) of subsidiaries	23,342,000		204,000		—		(23,546,000	)	—
Net income
(loss)	$ 25,469,000		23,342,000		204,000		(23,546,000	)	$ 25,469,000

The following reflects the condensed consolidating statement of operations for the three months ended January 31, 2007:

Net sales	Parent — $ —		109,833,000		1,630,000		(80,000	)	Consolidated Total — $ 111,383,000
Cost of
sales	—		60,659,000		954,000		(80,000	)	61,533,000
Gross profit	—		49,174,000		676,000		—		49,850,000
Expenses:
Selling, general and
administrative	—		17,506,000		751,000		—		18,257,000
Research and
development	—		7,147,000		469,000		—		7,616,000
Amortization of
intangibles	—		635,000		44,000		—		679,000
	—		25,288,000		1,264,000		—		26,552,000
Operating income
(loss)	—		23,886,000		(588,000	)	—		23,298,000
Other expense
(income):
Interest
expense	662,000		10,000		—		—		672,000
Interest income and
other	(3,284,000	)	(19,000	)	(12,000	)	—		(3,315,000	)
Income (loss) before
provision for (benefit from) income taxes and equity in undistributed
earnings (loss) of subsidiaries	2,622,000		23,895,000		(576,000	)	—		25,941,000
Provision for (benefit
from) income taxes	970,000		6,974,000		(174,000	)	—		7,770,000
Net earnings (loss)
before equity in undistributed earnings (loss) of subsidiaries	1,652,000		16,921,000		(402,000	)	—		18,171,000
Equity in undistributed
earnings (loss) of subsidiaries	16,519,000		(402,000	)	—		(16,117,000	)	—
Net income
(loss)	$ 18,171,000		16,519,000		(402,000	)	(16,117,000	)	$ 18,171,000

| (16) |
| --- |
| The following
reflects the condensed consolidating statement of operations for the six
months ended January 31, 2008: |

Net sales	Parent — $ —		261,192,000		6,099,000		(206,000	)	Consolidated Total — $ 267,085,000
Cost of
sales	—		147,735,000		2,753,000		(206,000	)	150,282,000
Gross profit	—		113,457,000		3,346,000		—		116,803,000
Expenses:
Selling, general and
administrative	—		39,005,000		2,698,000		—		41,703,000
Research and
development	—		18,759,000		1,422,000		—		20,181,000
Amortization of
intangibles	—		725,000		88,000		—		813,000
	—		58,489,000		4,208,000		—		62,697,000
Operating income
(loss)	—		54,968,000		(862,000	)	—		54,106,000
Other expense
(income):
Interest
expense	1,323,000		24,000		—		—		1,347,000
Interest income and
other	(8,434,000	)	(82,000	)	(26,000	)	—		(8,542,000	)
Income (loss) before
provision for (benefit from) income taxes and equity in undistributed
earnings (loss) of subsidiaries	7,111,000		55,026,000		(836,000	)	—		61,301,000
Provision for (benefit
from) income taxes	2,631,000		19,011,000		(504,000	)	—		21,138,000
Net earnings (loss)
before equity in undistributed earnings (loss) of subsidiaries	4,480,000		36,015,000		(332,000	)	—		40,163,000
Equity in undistributed
earnings (loss) of subsidiaries	35,683,000		(332,000	)	—		(35,351,000	)	—
Net income
(loss)	$ 40,163,000		35,683,000		(332,000	)	(35,351,000	)	$ 40,163,000

The following reflects the condensed consolidating statement of operations for the six months ended January 31, 2007:

Net sales	Parent — $ —		203,133,000		5,555,000		(235,000	)	Consolidated Total — $ 208,453,000
Cost of
sales	—		116,575,000		2,888,000		(235,000	)	119,228,000
Gross profit	—		86,558,000		2,667,000		—		89,225,000
Expenses:
Selling, general and
administrative	—		33,054,000		1,790,000		—		34,844,000
Research and
development	—		13,889,000		884,000		—		14,773,000
Amortization of
intangibles	—		1,240,000		88,000		—		1,328,000
	—		48,183,000		2,762,000		—		50,945,000
Operating income
(loss)	—		38,375,000		(95,000	)	—		38,280,000
Other expense
(income):
Interest
expense	1,323,000		44,000		—		—		1,367,000
Interest income and
other	(6,429,000	)	(37,000	)	(24,000	)	—		(6,490,000	)
Income (loss) before
provision for (benefit from) income taxes and equity in undistributed
earnings (loss) of subsidiaries	5,106,000		38,368,000		(71,000	)	—		43,403,000
Provision for (benefit
from) income taxes	1,889,000		12,543,000		(27,000	)	—		14,405,000
Net earnings (loss)
before equity in undistributed earnings (loss) of subsidiaries	3,217,000		25,825,000		(44,000	)	—		28,998,000
Equity in undistributed
earnings (loss) of subsidiaries	25,781,000		(44,000	)	—		(25,737,000	)	—
Net income
(loss)	$ 28,998,000		25,781,000		(44,000	)	(25,737,000	)	$ 28,998,000

| (16) |
| --- |
| The following
reflects the condensed consolidating statement of cash flows for the six
months ended January 31, 2008: |

	Parent								Consolidated Total
Cash flows from
operating activities:
Net income
(loss)	$ 40,163,000		35,683,000		(332,000	)	(35,351,000	)	$ 40,163,000
Adjustments to
reconcile net income (loss) to net cash (used in) provided by operating
activities:
Depreciation and
amortization of property, plant and equipment	101,000		4,160,000		110,000		—		4,371,000
Amortization of
intangible assets with finite lives	—		725,000		88,000		—		813,000
Amortization of
stock-based compensation	2,164,000		3,020,000		87,000		—		5,271,000
Amortization of
deferred financing costs	273,000		—		—		—		273,000
Provision for (benefit
from) allowance for doubtful accounts	—		45,000		(50,000	)	—		(5,000	)
Provision for excess
and obsolete inventory	—		1,228,000		8,000		—		1,236,000
Excess income tax
benefit from stock award exercises	(1,523,000	)	—		—		—		(1,523,000	)
Deferred income tax
(benefit) expense	(106,000	)	9,000		—		—		(97,000	)
Equity in undistributed
(earnings) loss of subsidiaries	(35,683,000	)	332,000		—		35,351,000		—
Intercompany
accounts	(12,765,000	)	15,118,000		(2,353,000	)	—		—
Changes in assets and
liabilities, net of effects of acquisition:
Accounts
receivable	—		(43,074,000	)	4,288,000		—		(38,786,000	)
Inventories	—		(16,492,000	)	(391,000	)	—		(16,883,000	)
Prepaid expenses and
other current assets	586,000		819,000		(3,034,000	)	316,000		(1,313,000	)
Other assets	—		65,000		4,000		—		69,000
Accounts
payable	(15,000	)	3,471,000		1,593,000		(3,191,000	)	1,858,000
Accrued expenses and
other current liabilities	(3,866,000	)	(324,000	)	204,000		—		(3,986,000	)
Customer advances and
deposits	—		925,000		3,085,000		—		4,010,000
Income taxes
payable	3,880,000		—		—		(316,000	)	3,564,000
Net cash (used in)
provided by operating activities	(6,791,000	)	5,710,000		3,307,000		(3,191,000	)	(965,000	)
Cash flows from
investing activities:
Purchases of property,
plant and equipment	(52,000	)	(6,169,000	)	(165,000	)	—		(6,386,000	)
Purchase of other
intangibles with finite lives	—		(193,000	)	—		—		(193,000	)
Payments for business
acquisition	—		(265,000	)	—		—		(265,000	)
Net cash used in
investing activities	(52,000	)	(6,627,000	)	(165,000	)	—		(6,844,000	)
Cash flows from
financing activities:
Principal payments on
other obligations	—		(66,000	)	—		—		(66,000	)
Excess income tax
benefit from stock award exercises	1,523,000		—		—		—		1,523,000
Proceeds from exercises
of stock options	3,939,000		—		—		—		3,939,000
Proceeds from issuance
of employee stock purchase plan shares	448,000		—		—		—		448,000
Net cash provided by
(used in) financing activities	5,910,000		(66,000	)	—		—		5,844,000
Net (decrease) increase
in cash and cash equivalents	(933,000	)	(983,000	)	3,142,000		(3,191,000	)	(1,965,000	)
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	$ 339,684,000		—		4,445,000		(3,191,000	)	$ 340,938,000

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

	Parent								Consolidated Total
Cash flows from
operating activities:
Net income
(loss)	$ 28,998,000		25,781,000		(44,000	)	(25,737,000	)	$ 28,998,000
Adjustments to
reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and
amortization of property, plant and equipment	92,000		3,362,000		104,000		—		3,558,000
Amortization of
intangible assets with finite lives	—		1,240,000		88,000		—		1,328,000
Amortization of
stock-based compensation	1,328,000		2,017,000		2,000		—		3,347,000
Amortization of
deferred financing costs	273,000		—		—		—		273,000
(Gain) loss on disposal
of property, plant and equipment	—		(3,000	)	1,000		—		(2,000	)
Provision for (benefit
from) allowance for doubtful accounts	—		144,000		(126,000	)	—		18,000
Provision for excess
and obsolete inventory	—		1,570,000		(21,000	)	—		1,549,000
Excess income tax
benefit from stock award exercises	(1,855,000	)	—		—		—		(1,855,000	)
Deferred income tax
expense (benefit)	158,000		(498,000	)	—		—		(340,000	)
Equity in undistributed
(earnings) loss of subsidiaries	(25,781,000	)	44,000		—		25,737,000		—
Intercompany
accounts	13,362,000		(11,969,000	)	(1,393,000	)	—		—
Changes in assets and
liabilities, net of effects of acquisition:
Restricted cash
securing letter of credit obligations	—		1,003,000		—		—		1,003,000
Accounts
receivable	—		(1,299,000	)	2,628,000		—		1,329,000
Inventories	—		(14,025,000	)	21,000		—		(14,004,000	)
Prepaid expenses and
other current assets	(306,000	)	1,602,000		206,000		—		1,502,000
Other assets	—		105,000		1,000		—		106,000
Accounts
payable	302,000		(8,888,000	)	(198,000	)	—		(8,784,000	)
Accrued expenses and
other current liabilities	(1,668,000	)	(806,000	)	(1,243,000	)	—		(3,717,000	)
Customer advances and
deposits	—		5,602,000		1,000		—		5,603,000
Deferred service
revenue	—		(4,990,000	)	—		—		(4,990,000	)
Income taxes
payable	3,092,000		—		(800,000	)	—		2,292,000
Net cash provided by
(used in) operating activities	17,995,000		(8,000	)	(773,000	)	—		17,214,000
Cash flows from
investing activities:
Purchases of property,
plant and equipment	(45,000	)	(4,572,000	)	(253,000	)	—		(4,870,000	)
Purchase of other
intangibles with finite lives	—		(2,614,000	)	—		—		(2,614,000	)
Net cash used in
investing activities	(45,000	)	(7,186,000	)	(253,000	)	—		(7,484,000	)
Cash flows from
financing activities:
Principal payments on
other obligations	—		(91,000	)	—		—		(91,000	)
Excess income tax
benefit from stock award exercises	1,855,000		—		—		—		1,855,000
Proceeds from exercises
of stock options	2,770,000		—		—		—		2,770,000
Proceeds from issuance
of employee stock purchase plan shares	363,000		—		—		—		363,000
Net cash provided by
(used in) financing activities	4,988,000		(91,000	)	—		—		4,897,000
Net increase (decrease)
in cash and cash equivalents	22,938,000		(7,285,000	)	(1,026,000	)	—		14,627,000
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	$ 261,236,000		2,664,000		2,314,000		—		$ 266,214,000

| ITEM
2. |
| --- |
| 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, risks associated with the subpoena from the U.S. Immigration and Customs Enforcement branch of the Department of Homeland Security, 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 as well as third party commercial customers who outsource a portion of their manufacturing to us. Accordingly, our telecommunications transmission 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 and high-power switches.

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 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. government is generally 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.

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 or produced. 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 life of stock-based compensation awards. As a result, if other assumptions or estimates had been used for awards 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.

Impairment of Goodwill and Other Intangible Assets . As of January 31, 2008, our goodwill and other intangible assets aggregated $30.2 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.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2008 AND JANUARY 31, 2007

Net Sales. Consolidated net sales were $152.0 million and $111.4 million for the three months ended January 31, 2008 and 2007, respectively, representing an increase of $40.6 million, or 36.4%. The increase in net sales reflects significant growth in both our mobile data communications and RF microwave amplifiers segments, partially offset by lower sales, as anticipated, in our telecommunications transmission segment.

Net sales in our telecommunications transmission segment were $50.2 million and $62.6 million for the three months ended January 31, 2008 and 2007, respectively, a decrease of $12.4 million, or 19.8%. Sales in this segment reflect increased sales of satellite earth station products which were more than offset by lower sales, as anticipated, of over-the-horizon microwave systems. Net sales of our satellite earth station products for the three months ended January 31, 2008 were higher than the three months ended January 31, 2007 as we continue to benefit from the ongoing strong demand for our bandwidth efficient satellite earth station modems, including those used to support cellular backhaul applications. Sales of our over-the-horizon microwave systems for the three months ended January 31, 2008 were lower than the three months ended January 31, 2007 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 indirect sales to our North African country end-customer. We believe our North African country end-customer is between major phases of a multi-year roll-out of a large project. Net sales in the telecommunications transmission segment for the three months ended January 31, 2007 were positively impacted by $1.2 million relating to a gross profit adjustment on a large over-the-horizon microwave systems contract. Our telecommunications transmission segment represented 33.0% of consolidated net sales for the three months ended January 31, 2008 as compared to 56.2% for the three months ended January 31, 2007.

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 associated with 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 systems. That notwithstanding, based on orders received to-date, our expectations of continued strong satellite earth station product bookings and the receipt of additional orders from the U.S. DoD for our AN/TRC-170 equipment and related services, we believe that annual sales in fiscal 2008 in our telecommunications transmission segment should approximate the level of annual sales we achieved in fiscal 2007. We believe it is reasonably likely that we will book at least one contract relating to our North African country end-customer in fiscal 2008, we do not expect that it will contribute significantly to net sales until fiscal 2009.

Net sales in our mobile data communications segment were $87.7 million and $39.7 million for the three months ended January 31, 2008 and 2007, respectively, an increase of $48.0 million, or 120.9%. This 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, including deliveries to the Army National Guard. Net sales for the three months ended January 31, 2007 included sales of $3.8 million relating to a favorable gross profit adjustment on our original MTS contract. Our mobile data communications segment represented 57.7% of consolidated net sales for the three months ended January 31, 2008 as compared to 35.6% for the three months ended January 31, 2007.

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 IDIQ, and as such, the U.S. Army is generally not obligated to purchase any equipment or services under these contracts. Sales for the three months ended January 31, 2008 are expected to be the peak quarter in fiscal 2008, as we shipped against a significant amount of orders received during the three months ended October 31, 2007. Based on our current backlog and expected additional MTS and BFT contract orders, we currently anticipate that our mobile data communications segment’s annual sales will grow in fiscal 2008 as compared to fiscal 2007 and that sales in our mobile data communications segment are expected to exceed those of our telecommunications transmission segment in fiscal 2008. In addition, we are aware, that on occasion, the U.S. government has experienced delays in the receipt of certain components that are eventually provided to us for incorporation into our mobile satellite transceivers. Although we currently anticipate receiving sufficient quantities of these components, if we do not receive them in a timely manner, we could experience delays in fulfilling funded and anticipated orders from our customers.

Net sales in our RF microwave amplifiers segment were $14.1 million for the three months ended January 31, 2008, compared to $9.1 million for the three months ended January 31, 2007, an increase of $5.0 million, or 54.9%. 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 9.3% of consolidated net sales for the three months ended January 31, 2008 as compared to 8.2% for the three months ended January 31, 2007.

Based on the level 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.

International sales (which include sales to U.S. companies for inclusion in products that are sold to international customers) represented 23.4% and 28.6% of consolidated net sales for the three months ended January 31, 2008 and 2007, respectively. Domestic commercial sales represented 6.0% and 12.9% of consolidated net sales for the three months ended January 31, 2008 and 2007, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 70.6% and 58.5% of consolidated net sales for the three months ended January 31, 2008 and 2007, respectively.

Gross Profit. Gross profit was $66.3 million and $49.9 million for the three months ended January 31, 2008 and 2007, respectively, representing an increase of $16.4 million, or 32.9%. The increase in gross profit was attributable to the increase in net sales discussed above. Gross profit as a percentage of net sales was 43.6% for the three months ended January 31, 2008 as compared to 44.8% for the three months ended, January 31, 2007.

Excluding the impact of adjustments discussed below, our gross profit as a percentage of net sales for the three months ended January 31, 2007, would have been 42.7%. The increase in gross profit percentage from 42.7% to 43.6% was driven by increased gross profit percentages in both our mobile data communications and telecommunications transmission segments, offset by the impact of a higher percentage of consolidated net sales occurring within the mobile data communications segment, which typically has a lower gross profit percentage than our telecommunications transmission segment. In addition, we experienced a lower gross profit percentage in our RF microwave amplifiers segment.

Our mobile data communications segment experienced a higher gross profit percentage due to increased operating efficiencies associated with increased sales related to our new MTS and BFT contracts and a more favorable product mix during the three months ended January 31, 2008 as compared to the three months ended January 31, 2007. Our telecommunications transmission segment experienced a higher gross profit percentage as it benefited from increased usage of our high-volume technology manufacturing center (including both incremental satellite earth station product sales and use by our two other operating segments) that was partially offset by lower sales of our 16 Mbps troposcatter modem upgrade kits. Our RF microwave amplifiers segment experienced a lower gross profit percentage due to long production times associated with certain complex amplifiers and high-power switches that employ newer technology.

During the three months ended January 31, 2007, we recorded favorable cumulative gross profit adjustments of $4.9 million (of which $3.8 million related to our original MTS contract and $1.1 million related to a large over-the-horizon microwave system contract in the telecommunications transmission segment), resulting from our ongoing review of total estimated contract revenues and costs, and the related gross margin at completion, on long-term contracts. These adjustments were partially offset by a $0.4 million firmware-related warranty provision in our mobile data communications segment.

Included in cost of sales for the three months ended January 31, 2008 and 2007 are provisions for excess and obsolete inventory of $0.7 million and $1.0 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 $21.3 million and $18.3 million for the three months ended January 31, 2008 and 2007, respectively, representing an increase of $3.0 million, or 16.4%. The increase in expenses was primarily attributable to higher payroll-related expenses (including amortization of stock-based compensation and cash-based incentive compensation) associated with the overall increase in net sales and profits of the Company, and to a lesser extent, legal and other professional fees associated with the Brazil Subpoena matter, discussed in “Notes to Condensed Consolidated Financial Statements – Note (15) Legal Proceedings” . As a percentage of consolidated net sales, selling, general and administrative expenses were 14.0% and 16.4% for the three months ended January 31, 2008 and 2007, respectively. The decrease in percentage is primarily due to the increase in net sales for the three months ended January 31, 2008.

Assuming no significant change or unexpected findings related to the Brazil Subpoena, we expect selling, general and administrative expenses, as a percentage of consolidated net sales, for fiscal year 2008 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 January 31, 2008 from $1.2 million in the three months ended January 31, 2007.

Research and Development Expenses. Research and development expenses were $9.1 million and $7.6 million for the three months ended January 31, 2008 and 2007, respectively, representing an increase of $1.5 million, or 19.7%. The increase in expenses primarily reflects our continued investment in research and development efforts across all of our business segments.

For the three months ended January 31, 2008 and 2007, research and development expenses of $5.8 million and $5.1 million, respectively, related to our telecommunications transmission segment, $2.0 million and $1.7 million, respectively, related to our mobile data communications segment, $0.9 million and $0.6 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 $0.4 million in the three months ended January 31, 2008 from $0.2 million in the three months ended January 31, 2007.

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 January 31, 2008 and 2007, customers reimbursed us $2.4 million and $1.4 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. As a percentage of consolidated net sales, research and development expenses were 6.0% and 6.8% for the three months ended January 31, 2008 and 2007, respectively.

Amortization of Intangibles. Amortization of intangibles was $0.4 million and $0.7 million for the three months ended January 31, 2008 and 2007, respectively. The amortization primarily relates to intangibles with finite lives that we acquired in connection with various acquisitions. The decrease in amortization of intangibles for the three months ended January 31, 2008 is related to certain intangibles that have been fully amortized.

Operating Income. Operating income for the three months ended January 31, 2008 and 2007 was $35.4 million and $23.3 million, respectively. The $12.1 million, or 51.9% increase, was primarily the result of the higher consolidated net sales during the three months ended January 31, 2008, partially offset by a lower consolidated gross margin percentage and increased operating expenses (including research and development expenses) as discussed above.

Operating income in our telecommunications transmission segment decreased to $13.2 million for the three months ended January 31, 2008 from $19.4 million for the three months ended January 31, 2007, primarily driven by lower net sales, as discussed above. In addition, operating expenses (which include expenses associated with the Brazil Subpoena matter) were slightly higher. As discussed above under “Gross Profit,” included in operating income in the three months ended January 31, 2007 is a cumulative adjustment related to a large over-the-horizon microwave system contract which favorably impacted operating income by $0.9 million.

Our mobile data communications segment generated operating income of $28.3 million for the three months ended January 31, 2008 as compared to $8.2 million for the three months ended January 31, 2007. The increase in operating income was primarily due to the significant increase in net sales and gross margins achieved during the three months ended January 31, 2008, partially offset by increased operating expenses. As discussed above under “ Gross Profit ,” included in operating income in the three months ended January 31, 2007 is the positive impact from a cumulative adjustment related to our original MTS contract, net of the respective firmware-related warranty provision, of $2.9 million.

Operating income in our RF microwave amplifiers segment increased to $1.0 million for the three months ended January 31, 2008 from $0.8 million for the three months ended January 31, 2007 due primarily to an increase in net sales (at a lower gross profit percentage) offset by increased spending on research and development activities.

Unallocated operating expenses increased to $7.1 million for the three months ended January 31, 2008 from $5.2 million for the three months ended January 31, 2007 due to higher payroll-related expenses (including amortization of stock-based compensation and cash-based incentive compensation) as well as increased other costs associated with growing our business. Amortization of stock-based compensation expense increased to $2.6 million in the three months ended January 31, 2008 from $1.5 million in the three months ended January 31, 2007. 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 January 31, 2008 as compared to the three months ended January 31, 2007.

Interest Expense. Interest expense was $0.7 million for both the three months ended January 31, 2008 and 2007. Interest expense primarily represents interest associated with our 2.0% convertible senior notes.

Interest Income and Other. Interest income and other for the three months ended January 31, 2008 was $4.1 million, as compared to $3.3 million for the three months ended January 31, 2007. The $0.8 million increase was primarily due to an increase in investable cash since January 31, 2007, partially offset by a decline in interest rates.

Provision for Income Taxes. The provision for income taxes was $13.4 million and $7.8 million for the three months ended January 31, 2008 and 2007, respectively. Our effective tax rate was 34.5% and 30.0% for the three months ended January 31, 2008 and 2007, respectively. The increase in the effective tax rate for the three months ended January 31, 2008 is attributable to the recording of certain net tax benefits, primarily the retroactive extension (in December 2006) of the Federal research and experimentation credit, that are reflected in the effective tax rate for the three months ended January 31, 2007. In addition, we recorded discrete tax benefits of approximately $0.1 million and $0.2 million for the three months ended January 31, 2008 and January 31, 2007, respectively, relating to disqualifying dispositions of incentive stock options.

Excluding the discrete tax benefits, we currently expect that our effective tax rate for fiscal 2008 will approximate 34.75%. Our effective tax rate for fiscal year 2008 reflects the fact that the Federal research and experimentation credit has expired as of December 31, 2007.

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.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2008 AND JANUARY 31, 2007

Net Sales. Consolidated net sales were $267.1 million and $208.5 million for the six months ended January 31, 2008 and 2007, respectively, representing an increase of $58.6 million, or 28.1%. The increase in net sales reflects significant growth in the mobile data communications and RF microwave amplifiers segments, partially offset by lower net sales, as anticipated, in the telecommunications transmission segment.

Net sales in our telecommunications transmission segment were $99.1 million and $114.6 million for the six months ended January 31, 2008 and 2007, respectively, a decrease of $15.5 million, or 13.5%. Sales in this segment reflect increased sales of satellite earth station products which were more than offset by lower sales, as anticipated, of over-the-horizon microwave systems. Net sales of our satellite earth station products for the six months ended January 31, 2008 were higher than the six months ended January 31, 2007 as we continue to benefit from the ongoing strong demand for our bandwidth efficient satellite earth station modems, including those used to support cellular backhaul applications. Sales of our over-the-horizon microwave systems for the six months ended January 31, 2008 were significantly lower than the six months ended January 31, 2007 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 indirect sales to our North African country end-customer. We believe our North African country end-customer is between major phases of a multi-year roll-out of a large project. Net sales in the telecommunications transmission segment for the six months ended January 31, 2007 were positively impacted by $1.2 million relating to a gross profit adjustment on a large over-the-horizon microwave systems contract. Our telecommunications transmission segment represented 37.1% of consolidated net sales for the six months ended January 31, 2008 as compared to 54.9% for the six months ended January 31, 2007.

Net sales in our mobile data communications segment were $140.7 million and $75.4 million for the six months ended January 31, 2008 and 2007, respectively, an increase of $65.3 million, or 86.6%. This 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, including deliveries to the Army National Guard. Net sales for the six months ended January 31, 2007 included sales of $1.1 million relating to a favorable gross profit adjustment on our original MTS contract. Our mobile data communications segment represented 52.7% of consolidated net sales for the six months ended January 31, 2008 as compared to 36.2% for the six months ended January 31, 2007.

Net sales in our RF microwave amplifiers segment were $27.3 million for the six months ended January 31, 2008, compared to $18.5 million for the six months ended January 31, 2007, an increase of $8.8 million, or 47.6%. 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 CREW 2.1 program. Our RF microwave amplifiers segment represented 10.2% of consolidated net sales for the six months ended January 31, 2008 as compared to 8.9% for the six months ended January 31, 2007.

International sales (which include sales to U.S. companies for inclusion in products that are sold to international customers) represented 26.5% and 29.0% of consolidated net sales for the six months ended January 31, 2008 and 2007, respectively. Domestic commercial sales represented 7.2% and 13.5% of consolidated net sales for the six months ended January 31, 2008 and 2007, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 66.3% and 57.5% of consolidated net sales for the six months ended January 31, 2008 and 2007, respectively.

Gross Profit. Gross profit was $116.8 million and $89.2 million for the six months ended January 31, 2008 and 2007, respectively, representing an increase of $27.6 million, or 30.9%. The increase in gross profit was attributable to the increase in net sales discussed above. Gross profit as a percentage of net sales was 43.7% for the six months ended January 31, 2008 as compared to 42.8% for the six months ended January 31, 2007.

Excluding the impact of adjustments discussed below, our gross profit as a percentage of net sales for the six months ended January 31, 2007, would have been 41.2%. The increase in gross profit percentage from 41.2% to 43.7% was driven by increased gross profit percentages in both our mobile data communications and telecommunications transmission segments, offset by the impact of a higher percentage of consolidated net sales occurring within the mobile data communications segment, which typically has a lower gross profit percentage than our telecommunications transmission segment. In addition, we experienced a lower gross profit percentage in our RF microwave amplifiers segment.

Our mobile data communications segment experienced a higher gross profit percentage due to increased operating efficiencies associated with increased sales related to our new MTS and BFT contracts and a more favorable product mix during the six months ended January 31, 2008 as compared to the six months ended January 31, 2007. Our telecommunications transmission segment experienced a higher gross profit percentage as it benefited from increased usage of our high-volume technology manufacturing center (including both incremental satellite earth station product sales and use by our two other operating segments) that were partially offset by lower sales of our 16 Mbps troposcatter modem upgrade kits. Our RF microwave amplifiers segment experienced a lower gross profit percentage due to long production times associated with certain complex amplifiers and high-power switches that employ newer technology.

During the six months ended January 31, 2007, we recorded favorable cumulative gross profit adjustments of $4.7 million (of which $3.6 million related to our original MTS contract and $1.1 million related to a large over-the-horizon microwave system contract in the telecommunications transmission segment) resulting from our ongoing review of total estimated contract revenues and costs, and the related gross margin at completion, on long-term contracts. These adjustments were partially offset by a $0.4 million firmware-related warranty provision in our mobile data communications segment.

Included in cost of sales for the six months ended January 31, 2008 and 2007 are provisions for excess and obsolete inventory of $1.2 million and $1.5 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 $41.7 million and $34.8 million for the six months ended January 31, 2008 and 2007, respectively, representing an increase of $6.9 million, or 19.8%.

The increase in expenses was primarily attributable to higher payroll-related expenses (including amortization of stock-based compensation and cash-based incentive compensation) associated with the overall increase in net sales and profits of our Company and, to a lesser extent, legal and other professional fees for the matters discussed in “Notes to Condensed Consolidated Financial Statements – Note (15) Legal Proceedings” . As a percentage of consolidated net sales, selling, general and administrative expenses were 15.6% and 16.7% for the six months ended January 31, 2008 and 2007, respectively. The decrease in percentage is due primarily to the increase in net sales for the three months ended January 31, 2008.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses increased to $4.0 million in the six months ended January 31, 2008 from $2.6 million in the six months ended January 31, 2007.

Research and Development Expenses. Research and development expenses were $20.2 million and $14.8 million for the six months ended January 31, 2008 and 2007, respectively, representing an increase of $5.4 million, or 36.5%. The increase in expenses primarily reflects our continued investment in research and development efforts across all of our business segments.

For the six months ended January 31, 2008 and 2007, research and development expenses of $12.0 million and $10.0 million, respectively, related to our telecommunications transmission segment, $5.5 million and $3.0 million, respectively, related to our mobile data communications segment, $1.8 million and $1.3 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 $0.9 million in the six months ended January 31, 2008 from $0.5 million in the six months ended January 31, 2007.

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 six months ended January 31, 2008 and 2007, customers reimbursed us $3.1 million and $3.2 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. As a percentage of consolidated net sales, research and development expenses were 7.6% and 7.1% for the six months ended January 31, 2008 and 2007, respectively.

Amortization of Intangibles. Amortization of intangibles for the six months ended January 31, 2008 and 2007 was $0.8 million and $1.3 million, respectively. The amortization primarily relates to intangibles with finite lives that we acquired in connection with various acquisitions. The decrease in amortization of intangibles for the six months ended January 31, 2008 is related to certain intangibles that have been fully amortized.

Operating Income. Operating income for the six months ended January 31, 2008 and 2007 was $54.1 million and $38.3 million, respectively. The $15.8 million, or 41.3% increase, was primarily the result of the higher consolidated sales and gross margin percentage during the six months ended January 31, 2008, partially offset by increased operating expenses (including research and development expenses) as discussed above.

Operating income in our telecommunications transmission segment decreased to $24.1 million for the six months ended January 31, 2008 from $32.3 million for the six months ended January 31, 2007, primarily as a result of lower net sales and increased operating expenses (including expenses associated with the Brazil Subpoena matter). As discussed above under “ Gross Profit ,” included in operating income for the six months ended January 31, 2007 is a cumulative adjustment related to a large over-the-horizon microwave systems contract which favorably impacted operating income by $0.9 million.

Our mobile data communications segment generated operating income of $41.1 million for the six months ended January 31, 2008 as compared to $14.3 million for the six months ended January 31, 2007. The increase in operating income was primarily due to the significant increase in net sales and gross margins achieved during the six months ended January 31, 2008, partially offset by increased operating expenses including increased spending on research and development activities. As discussed above under “ Gross Profit ,” included in operating income in the six months ended January 31, 2007 is the positive impact from the cumulative adjustment, net of the respective firmware-related warranty provision, of $2.8 million.

Operating income in our RF microwave amplifiers segment increased to $2.1 million for the six months ended January 31, 2008 from $1.7 million for the six months ended January 31, 2007 due primarily to an increase in net sales (at a lower gross profit percentage) offset by increased spending on research and development activities.

Unallocated operating expenses increased to $13.2 million for the six months ended January 31, 2008 from $10.0 million for the six months ended January 31, 2007 due to higher payroll-related expenses (including increased amortization of stock-based compensation and cash-based incentive compensation) as well as increased other costs associated with growing our business. Amortization of stock-based compensation expense increased to $5.3 million in the six months ended January 31, 2008 from $3.3 million in the six months ended January 31, 2007. 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 six months ended January 31, 2008 as compared to the six months ended January 31, 2007.

Interest Expense. Interest expense was $1.3 million and $1.4 million for the six months ended January 31, 2008 and 2007, respectively. Interest expense primarily represents interest associated with our 2.0% convertible senior notes.

Interest Income and Other. Interest income and other for the six months ended January 31, 2008 was $8.5 million, as compared to $6.5 million for the six months ended January 31, 2007. The $2.0 million increase was primarily due to an increase in investable cash since January 31, 2007, partially offset by a decline in interest rates.

Provision for Income Taxes. The provision for income taxes was $21.1 million and $14.4 million for the six months ended January 31, 2008 and 2007, respectively. Our effective tax rate was 34.5% and 33.2% for the six months ended January 31, 2008 and 2007, respectively. The increase in the effective tax rate for the six months ended January 31, 2008 is attributable to the recording of certain net tax benefits, primarily the retroactive extension (in December 2006) of the Federal research and experimentation credit, that are reflected in the effective tax rate for the six months ended January 31, 2007. In addition, we recorded discrete tax benefits of approximately $0.2 million for both the six months ended January 31, 2008 and January 31, 2007, relating to disqualifying dispositions of stock options.

LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted cash and cash equivalents decreased to $340.9 million at January 31, 2008 from $342.9 million at July 31, 2007.

Net cash used in operating activities was $1.0 million for the six months ended January 31, 2008, compared to $17.2 million of net cash provided by operations for the first six months of fiscal 2007. During the six months ended January 31, 2008 we experienced an increase in working capital requirements associated with the significant increase in sales activity across our Company. The increase in working capital requirements (primarily for accounts receivable and inventory) was driven by the timing of shipments and related collection of cash from our customers, as well as the necessary investment in inventory in support of current backlog that is expected to be recognized as revenue during the second half of fiscal 2008.

Net cash used in investing activities for the six months ended January 31, 2008 was $6.8 million, of which $6.4 million was for purchases of property, plant and equipment including expenditures related to ongoing equipment upgrades, as well as enhancements to our high-volume technology manufacturing center located in Tempe, Arizona.

Net cash provided by financing activities was $5.8 million for the six months ended January 31, 2008, due primarily to proceeds from stock option exercises and employee stock purchase plan shares aggregating $4.4 million and a $1.5 million excess income tax benefit from the exercise of stock awards.

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 Condensed 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 January 31, 2008, will materially adversely affect our liquidity.

At January 31, 2008, 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) — Total | Remainder of 2008 | 2009 and 2010 | 2011 and 2012 | After 2012 |
| --- | --- | --- | --- | --- | --- |
| 2.0%
convertible senior notes | $ 105,000 | — | — | — | 105,000 |
| Operating lease
commitments | 32,921 | 15,082 | 8,097 | 4,593 | 5,149 |
| Other
obligations | 188 | 75 | 113 | — | — |
| Total contractual cash
obligations | $ 138,109 | 15,157 | 8,210 | 4,593 | 110,149 |

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 December 17, 2007 through March 14, 2008. On the basis of the closing sale prices of our common stock through March 3, 2008, we also anticipate that the notes will be convertible during the conversion period of March 17, 2008 through June 16, 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 January 31, 2008, the balance of these agreements was $4.4 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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all of the information required to evaluate and understand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning of the first annual reporting period beginning after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”) to change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions involving minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company will adopt SFAS No. 160 beginning in the first quarter of fiscal 2010. We currently do not have any noncontrolling interests recorded in our financial statements; accordingly, we do not expect a material impact on our financial statements, upon adoption.

In December 2007, the FASB ratified the consensus in Emerging Issues Task Force Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF No. 07-1”), which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. We must adopt EITF No. 07-1 effective August 1, 2009. EITF No. 07-1 is generally to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. We currently do not participate in collaborative arrangements as defined by EITF No. 07-1; accordingly, we currently do not expect EITF No. 07-1 to have a material impact on our financial statements upon adoption.

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. Q uantitative 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 $1.4 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. As of January 31, 2008, we estimate the fair market value of our 2.0% convertible senior notes to be $155.7 million based on recent trading activity.

ITEM 4. C ontrols 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.

P ART II OTHER INFORMATION

ITEM 1. L egal 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. R isk 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 $2.0 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 (“ITAR”) and the Export Administration Regulations. CSI produced documents in response to the subpoena request and will continue to provide related information to ICE. 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 and to conduct our own investigation. Based on its ongoing investigation into this matter, we believe that the detained inventory, which consists of commercial satellite equipment, was not modified or adapted in any way to meet Brazilian military requirements and was only subject to the jurisdiction of the Department of Commerce and not the jurisdiction of the U.S. Department of State. In addition, in order to provide certain defense services, including conducting factory acceptance testing at CSI’s Florida facility, we also believe that CSI was required to obtain a license (referred to as a Technical Assistance Agreement (“TAA”)) from the U.S. Department of State. We believe that the TAA authorized all activities under the Brazil contract that were subject to the jurisdiction of the U.S. Department of State.

We believe that CSI made a good faith effort to comply with applicable regulations; however, we believe that CSI made inadvertent administrative errors resulting in a TAA that did not become effective on a timely basis. The administrative errors relate primarily to the execution of non-disclosure agreements (“NDA”) with certain third country national employees of CSI’s agent. These individuals have now signed appropriate NDAs, and, in December 2007, CSI filed an amended TAA with the U.S. Department of State. CSI has also requested that the U.S. Department of State confirm CSI’s and our view that the Brazil contract does not require any other State Department license.

We also engaged counsel to help us 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 injunction 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 January 31, 2008. 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.

ITEM 6. E xhibits

(a)
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

S IGNATURES

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: March 5,
2008 | By: | /s/ Fred
Kornberg |
| --- | --- | --- |
| | | Fred
Kornberg |
| | | Chairman of the
Board |
| | | Chief Executive Officer
and President |
| | | (Principal Executive
Officer) |
| Date: March 5,
2008 | By: | /s/ Michael
D. Porcelain |
| | | Michael D.
Porcelain |
| | | Senior Vice President
and |
| | | Chief Financial
Officer |
| | | (Principal Financial
and Accounting Officer) |

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