Edgar Filing: COMTECH TELECOMMUNICATIONS CORP /DE/

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, 2007

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

Commission File Number: 0-7928

(COMTECH LOGO)

(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 March 2, 2007, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 23,152,760 shares.

COMTECH TELECOMMUNICATIONS CORP.
INDEX


		Page


PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets – January 31, 2007 (Unaudited) and July 31, 2006	2

	Condensed Consolidated Statements of Operations - Three and Six Months Ended January 31, 2007 and 2006 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows - Six Months Ended January 31, 2007 and 2006 (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	34

Item 4.	Submission of Matters to a Vote of Security Holders	34

Item 6.	Exhibits	34

Signature Page		35

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


Item 1.	January 31, 2007			July 31, 2006

	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	266,214,000			251,587,000
Restricted cash		—			1,003,000
Accounts receivable, net		68,700,000			70,047,000
Inventories, net		73,816,000			61,043,000
Prepaid expenses and other current assets		5,676,000			7,178,000
Deferred tax asset – current		8,205,000			7,591,000

Total current assets		422,611,000			398,449,000

Property, plant and equipment, net		26,060,000			24,732,000
Goodwill		24,387,000			22,244,000
Intangibles with finite lives, net		6,276,000			6,855,000
Deferred financing costs, net		2,176,000			2,449,000
Other assets, net		431,000			537,000

Total assets	$	481,941,000			455,266,000


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	19,553,000			28,337,000
Accrued expenses and other current liabilities		38,126,000			41,230,000
Customer advances and deposits		9,147,000			3,544,000
Deferred service revenue		4,906,000			9,896,000
Current installments of other obligations		129,000			154,000
Interest payable		1,050,000			1,050,000
Income taxes payable		5,585,000			5,252,000

Total current liabilities		78,496,000			89,463,000

Convertible senior notes		105,000,000			105,000,000
Other obligations, less current installments		177,000			243,000
Deferred tax liability – non-current		6,592,000			6,318,000

Total liabilities		190,265,000			201,024,000

Commitments and contingencies (See Note 14)

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 23,348,622 shares and 23,052,593 shares at January 31, 2007 and July 31, 2006, respectively		2,335,000			2,305,000
Additional paid-in capital		147,893,000			139,487,000
Retained earnings		141,633,000			112,635,000

		291,861,000			254,427,000
Less:
Treasury stock (210,937 shares)		(185,000	)		(185,000	)

Total stockholders’ equity		291,676,000			254,242,000

Total liabilities and stockholders’ equity	$	481,941,000			455,266,000

See accompanying notes to condensed consolidated financial statements.

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


	Three months ended January 31,						Six months ended January 31,

	2007			2006			2007			2006


Net sales	$	111,383,000			95,741,000			208,453,000			202,308,000
Cost of sales		61,533,000			54,650,000			119,228,000			121,013,000

Gross profit		49,850,000			41,091,000			89,225,000			81,295,000


Expenses:
Selling, general and administrative		18,257,000			15,809,000			34,844,000			31,857,000
Research and development		7,616,000			6,007,000			14,773,000			12,756,000
Amortization of intangibles		679,000			603,000			1,328,000			1,199,000

		26,552,000			22,419,000			50,945,000			45,812,000


Operating income		23,298,000			18,672,000			38,280,000			35,483,000

Other expense (income):
Interest expense		672,000			672,000			1,367,000			1,346,000
Interest income		(3,315,000	)		(2,172,000	)		(6,490,000	)		(3,947,000	)


Income before provision for income taxes		25,941,000			20,172,000			43,403,000			38,084,000
Provision for income taxes		7,770,000			6,868,000			14,405,000			13,316,000

Net income	$	18,171,000			13,304,000			28,998,000			24,768,000


Net income per share:
Basic	$	0.79			0.59			1.26			1.09

Diluted	$	0.68			0.50			1.09			0.94


Weighted average number of common shares outstanding – basic		23,095,000			22,741,000			23,022,000			22,694,000


Weighted average number of common and common equivalent shares outstanding assuming dilution – diluted		27,491,000			27,354,000			27,440,000			27,367,000

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,

	2007			2006

Cash flows from operating activities:
Net income	$	28,998,000			24,768,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment		3,558,000			2,875,000
Amortization of intangible assets with finite lives		1,328,000			1,199,000
Amortization of stock-based compensation		3,347,000			2,834,000
Amortization of deferred financing costs		273,000			273,000
(Gain) loss on disposal of property, plant and equipment		(2,000	)		16,000
Provision for allowance for doubtful accounts		18,000			99,000
Provision for excess and obsolete inventory		1,549,000			987,000
Excess income tax benefit from stock option exercises		(1,855,000	)		(1,154,000	)
Deferred income tax (benefit) expense		(340,000	)		650,000
Changes in assets and liabilities, net of effects of acquisition:
Restricted cash securing letter of credit obligations		1,003,000			31,000
Accounts receivable		1,329,000			(20,036,000	)
Inventories		(14,004,000	)		(9,743,000	)
Prepaid expenses and other current assets		1,502,000			(1,459,000	)
Other assets		106,000			(38,000	)
Accounts payable		(8,784,000	)		(1,626,000	)
Accrued expenses and other current liabilities		(3,717,000	)		1,493,000
Customer advances and deposits		5,603,000			(189,000	)
Deferred service revenue		(4,990,000	)		2,035,000
Income taxes payable		2,292,000			3,310,000

Net cash provided by operating activities		17,214,000			6,325,000


Cash flows from investing activities:
Purchases of property, plant and equipment		(4,870,000	)		(4,643,000	)
Purchases of other intangibles with finite lives		—			(197,000	)
Payments for business acquisition		(2,614,000	)		—

Net cash used in investing activities		(7,484,000	)		(4,840,000	)


Cash flows from financing activities:
Principal payments on other obligations		(91,000	)		(115,000	)
Excess income tax benefit from stock option exercises		1,855,000			1,154,000
Proceeds from exercises of stock options		2,770,000			1,425,000
Proceeds from issuance of employee stock purchase plan shares		363,000			315,000

Net cash provided by financing activities		4,897,000			2,779,000


Net increase in cash and cash equivalents		14,627,000			4,264,000
Cash and cash equivalents at beginning of period		251,587,000			214,413,000

Cash and cash equivalents at end of period	$	266,214,000			218,677,000


Supplemental cash flow disclosures:
Cash paid during the period for:
Interest	$	1,073,000			1,073,000

Income taxes	$	12,055,000			9,447,000


Noncash investing activities:
Accrued business acquisition payments (See Note 5)	$	613,000			—

See accompanying notes to condensed consolidated financial statements.

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


(1)	General

	The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and Subsidiaries (the “Company”) as of and for the three and six months ended January 31, 2007 and 2006 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. For the three and six months ended January 31, 2007 and 2006, comprehensive income was equal to net income.

	The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results may differ from those estimates.

	These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2006 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 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 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,						Six months ended January 31,

	2007			2006			2007			2006

Cost of sales	$	122,000			105,000			262,000			181,000
Selling, general and administrative expenses		1,188,000			1,238,000			2,609,000			2,323,000
Research and development expenses		227,000			195,000			476,000			330,000

Stock-based compensation expense before income tax benefit		1,537,000			1,538,000			3,347,000			2,834,000
Income tax benefit		(579,000	)		(351,000	)		(1,074,000	)		(625,000	)

Net stock-based compensation expense	$	958,000			1,187,000			2,273,000			2,209,000

Of the total stock-based compensation expense before income tax benefit recognized in the three months ended January 31, 2007 and 2006, $41,000 and $99,000, 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, 2007 and 2006, $83,000 and $138,000, respectively, related to awards issued pursuant to the ESPP. Stock-based compensation that was capitalized and included in ending inventory at January 31, 2007 and July 31, 2006 was $58,000 and $61,000, respectively.


	The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during the three and six months ended January 31, 2007 and 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

	The per share weighted average fair value of stock options granted during the three months ended January 31, 2007 and 2006 was $13.79 and $15.79, respectively. The per share weighted average fair value of stock options granted during the six months ended January 31, 2007 and 2006 was $10.68 and $14.23, respectively. In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants in the respective periods are listed in the table below:



	Three months ended January 31,						Six months ended January 31,

	2007			2006			2007			2006

Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		45.47	%		50.90	%		45.47	%		51.76	%
Risk-free interest rate		4.48	%		4.43	%		4.89	%		4.12	%
Expected term (years)		3.63			3.63			3.63			3.63


	Options granted during the three and six months ended January 31, 2007 and 2006 had 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 options granted through July 31, 2005 had exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of ten years and generally a vesting period of five years.

	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 option term is the number of years that the Company estimates that options will be outstanding prior to exercise. The expected term of the awards issued after July 31, 2005 was determined using the “simplified method” prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107.

	The actual income tax benefit recorded relating to the exercise of stock option awards was $1,959,000 and $1,154,000 for the six months ended January 31, 2007 and 2006, respectively. Of these amounts, $1,855,000 and $1,154,000, respectively, represents excess income tax benefits and has been classified as a financing cash inflow in the Company’s Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2007 and 2006, respectively. The Company settles employee stock option exercises with new shares.

	At January 31, 2007, total remaining unrecognized compensation cost related to unvested stock-based awards was $14,895,000, net of estimated forfeitures of $1,498,000. The net cost is expected to be recognized over a weighted average period of 2.2 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 options and the conversion of convertible senior notes, if dilutive, outstanding during each period. Stock options to purchase 697,000 and 702,000 shares for the three months ended January 31, 2007 and 2006, respectively, were not included in the EPS calculation because their effect would have been anti-dilutive. Stock options to purchase 1,035,000 and 663,000 shares for the six months ended January 31, 2007 and 2006, respectively, were not included in the EPS calculation because their effect would have been anti-dilutive.

	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,			Six months ended January 31,

		2007	2006		2007	2006

Numerator:
Net income for basic calculation	$	18,171,000	13,304,000		28,998,000	24,768,000
Effect of dilutive securities:
Interest expense (net of tax) on convertible senior notes		417,000	408,000		833,000	831,000

Numerator for diluted calculation	$	18,588,000	13,712,000		29,831,000	25,599,000

Denominator:
Denominator for basic calculation		23,095,000	22,741,000		23,022,000	22,694,000
Effect of dilutive securities:
Stock options		1,063,000	1,280,000		1,085,000	1,340,000
Conversion of convertible senior notes		3,333,000	3,333,000		3,333,000	3,333,000

Denominator for diluted calculation		27,491,000	27,354,000		27,440,000	27,367,000


(5)	Acquisition

	In August 2006, the Company acquired certain assets and assumed certain liabilities of Insite Consulting, Inc. (“Insite”), a logistics application software company, for $3,227,000, including transaction costs of $256,000. To date, the Company has paid $2,614,000 and expects to make guaranteed payments of $613,000 through the first quarter of fiscal 2008. 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 would not have been material to the Company’s results of operations for the three and six months ended January 31, 2006 and were not material for the three and six months ended January 31, 2007. This operation was combined with the Company’s existing business and is part of the mobile data communications segment.


	The Insite purchase price was allocated as follows:


			Estimated Useful Lives

Fair value of net tangible assets acquired	$	335,000

Adjustments to record intangible assets at fair value:
Existing technology		447,000	7 years
Other intangibles		302,000	1 to 10 years
Goodwill		2,143,000	Indefinite

		2,892,000

Aggregate purchase price	$	3,227,000


	The valuation of existing technology was based primarily on the discounted capitalization of royalty expense saved because the Company now owns the asset. The valuation of other intangibles was primarily based on the value of the discounted cash flows that the related assets could be expected to generate in the future.

(6)	Accounts Receivable


Accounts receivable consist of the following:
	January 31, 2007		July 31, 2006

Accounts receivable from commercial customers	$	37,888,000		36,700,000
Unbilled receivables on contracts-in-progress		1,667,000		10,361,000
Amounts receivable from the U.S. government and its agencies		30,118,000		24,362,000

		69,673,000		71,423,000
Less allowance for doubtful accounts		973,000		1,376,000

Accounts receivable, net	$	68,700,000		70,047,000


	There was no retainage included in unbilled receivables at January 31, 2007 or July 31, 2006. In the opinion of management, substantially all of the unbilled balances will be billed and collected within one year. As of January 31, 2007 and July 31, 2006, a prime contractor represented 7.2% and 16.6%, respectively, of accounts receivable, net.

(7)	Inventories


Inventories consist of the following:
	January 31, 2007		July 31, 2006

Raw materials and components	$	42,582,000		35,835,000
Work-in-process and finished goods		37,837,000		31,331,000

		80,419,000		67,166,000
Less reserve for excess and obsolete inventories		6,603,000		6,123,000

Inventories, net	$	73,816,000		61,043,000


	Inventories directly related to long-term contracts were $18,147,000 and $8,349,000 at January 31, 2007 and July 31, 2006, respectively. At January 31, 2007 and July 31, 2006, $4,124,000 and $3,406,000, respectively, of the inventory balance above related to a contract from a third party commercial customer to outsource its manufacturing.


(8)	Accrued Expenses

	Accrued expenses and other current liabilities consist of the following:


	January 31, 2007		July 31, 2006

Accrued wages and benefits	$	12,824,000		17,361,000
Accrued commissions		4,897,000		5,745,000
Accrued warranty		10,564,000		10,468,000
Accrued hurricane related costs (See Note 14)		2,240,000		2,240,000
Accrued business acquisition payments (See Note 5)		613,000		—
Other		6,988,000		5,416,000

Accrued expenses and other current liabilities	$	38,126,000		41,230,000

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. In the six months ended January 31, 2007, the Company recorded a reduction in its estimated reserve for warranty obligations of $667,000 primarily due to lower than anticipated claims received to date on a large over-the-horizon microwave system contract whose warranty period is nearing expiration. Changes in the Company’s product warranty liability during the six months ended January 31, 2007 and 2006 were as follows:



	Six months ended January 31,

	2007			2006

Balance at beginning of period	$	10,468,000			7,910,000
Provision for warranty obligations		3,549,000			4,735,000
Reversal of warranty liability		(667,000	)		—
Charges incurred		(2,786,000	)		(1,828,000	)

Balance at end of period	$	10,564,000			10,817,000


(9)	2.0% Convertible Senior Notes


	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 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)	Stock Option Plans and Employee Stock Purchase Plan

	The Company has stock option and employee stock purchase plans as follows:

	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, 2007, the Company had granted stock options representing the right to purchase an aggregate of 2,016,218 shares (net of 428,441 canceled options) at prices ranging between $0.67 - $5.31 per share, of which 151,962 are outstanding at January 31, 2007. To date, 1,864,256 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, stock appreciation rights, 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 non-qualified stock options subject to certain limitations. The aggregate number of shares of common stock which may be issued may not exceed 5,737,500 plus the shares that were transferred to the Plan relating to outstanding awards that were previously granted, or available for grant, under the 1982 Incentive Stock Option Plan and the 1993 Incentive Stock Option Plan. The Stock Option Committee of the Company’s Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of incentive and non-qualified stock options may not have a term exceeding ten years or no more than five years in the case of an incentive stock option granted to a stockholder who owns stock representing more than 10% of the voting power. As of January 31, 2007, the Company had granted stock options representing the right to purchase an aggregate of 4,818,760 shares (net of 540,540 canceled options) at prices ranging between $3.13 - $41.51, of which 2,960,645 are outstanding at January 31, 2007. As of January 31, 2007, 1,858,115 stock options have been exercised. All options granted through January 31, 2007 had exercise prices equal to the fair market value of the common stock on the date of grant. All options granted through July 31, 2005 have a term of ten years. All options granted since August 1, 2005 have a term of five years.

The following table summarizes certain stock option activity during the three and six months ended January 31, 2007:


	Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value


Outstanding at July 31, 2006		2,919,242			$	15.99		5.9	$	34,373,000

Granted		645,100				27.00
Expired/canceled		(138,025	)			9.91
Exercised		(227,235	)			9.42

Outstanding at October 31, 2006		3,199,082				18.94		5.5	$	53,671,000

Granted		21,500				35.67
Expired/canceled		(52,925	)			27.06
Exercised		(55,050	)			11.45

Outstanding at January 31, 2007		3,112,607			$	19.05		5.2	$	52,834,000

Exercisable at January 31, 2007		1,002,232			$	13.40		5.7	$	22,664,000

Expected to vest at January 31, 2007		2,018,480			$	21.68		4.9	$	28,943,000


	The total intrinsic value of stock options exercised during the three months ended January 31, 2007 and 2006 was $1,454,000 and $1,869,000, respectively. The total intrinsic value of stock options exercised during the six months ended January 31, 2007 and 2006 was $6,677,000 and $5,766,000, 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 2007, the Company issued 248,595 shares of its common stock to participating employees in connection with the ESPP.

(11)	Customer and Geographic Information

	Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:



	Three months ended January 31,						Six months ended January 31,

	2007			2006			2007			2006

United States
U.S. government		58.5	%		47.5	%		57.5	%		47.4	%
Commercial customers		12.9	%		15.3	%		13.5	%		14.5	%

Total United States		71.4	%		62.8	%		71.0	%		61.9	%

International
North African country		4.6	%		10.8	%		4.2	%		13.2	%
Other international customers		24.0	%		26.4	%		24.8	%		24.9	%

Total International		28.6	%		37.2	%		29.0	%		38.1	%

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, 2007, except for sales to the U.S. government, no other customer represented more than 10% of consolidated net sales. For the three and six months ended January 31, 2006, one customer, a prime contractor, represented 12.0% and 12.1%, respectively, of consolidated net sales.


(12)	Segment Information

	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. Telecommunications transmission products include satellite earth station products (such as analog and digital modems, frequency converters, power amplifiers, and voice gateways) and over-the-horizon microwave communications products and systems. Mobile data communications products include satellite-based mobile location, tracking and messaging hardware and related services. RF microwave amplifier products include solid-state, high-power, broadband amplifier products that use the microwave and radio frequency spectrums.

	Unallocated expenses result from such corporate expenses as legal, accounting and executive compensation. In addition, for the three and six months ended January 31, 2007, unallocated expenses include $1,537,000 and $3,347,000, respectively, of stock-based compensation expense and for the three and six months ended January 31, 2006, unallocated expenses include $1,538,000 and $2,834,000, 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.



	Three months ended January 31, 2007

(in thousands)	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			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


	Three months ended January 31, 2006

(in thousands)	Telecommunications Transmission				Mobile Data Communications	RF Microwave Amplifiers	Unallocated		Total

Net sales		$	49,029		36,209	10,503	—		$	95,741
Operating income (expense)			13,032		7,648	2,069	(4,077	)		18,672
Interest income			(7	)	4	—	2,175			2,172
Interest expense			9		—	2	661			672
Depreciation and amortization			1,498		262	320	1,565			3,645
Expenditure for long-lived assets, including intangibles			1,315		126	355	18			1,814
Total assets at January 31, 2006			124,386		39,504	22,095	231,334			417,319



	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			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


	Six months ended January 31, 2006

(in thousands)	Telecommunications Transmission				Mobile Data Communications		RF Microwave Amplifiers	Unallocated		Total

Net sales		$	99,913		75,643		26,752	—		$	202,308
Operating income (expense)			25,270		11,849		6,277	(7,913	)		35,483
Interest income			(38	)	(9	)	—	3,994			3,947
Interest expense			20		—		3	1,323			1,346
Depreciation and amortization			2,928		504		590	2,886			6,908
Expenditure for long-lived assets, including intangibles			3,975		360		464	41			4,840
Total assets at January 31, 2006			124,386		39,504		22,095	231,334			417,319

Intersegment sales for the three months ended January 31, 2007 and 2006 by the telecommunications transmission segment to the RF microwave amplifiers segment were $1,727,000 and $2,462,000, respectively. Intersegment sales for the six months ended January 31, 2007 and 2006 by the telecommunications transmission segment to the RF microwave amplifiers segment were $3,568,000 and $3,307,000, respectively. For the three months ended January 31, 2007 and 2006, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $16,331,000 and $10,115,000, respectively. For the six months ended January 31, 2007 and 2006, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $33,736,000 and $28,401,000, respectively. Intersegment sales have been eliminated from the tables above.


(13)	Intangible Assets
	Intangible assets with finite lives as of January 31, 2007 and July 31, 2006 are as follows:


	January 31, 2007

	Weighted Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount

Existing technology		7.22	$	12,903,000		10,396,000	$	2,507,000
Proprietary, core and licensed technology		8.57		5,145,000		1,910,000		3,235,000
Other		5.61		975,000		441,000		534,000

Total			$	19,023,000		12,747,000	$	6,276,000


	July 31, 2006

	Weighted Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount

Existing technology		7.23	$	12,456,000		9,494,000	$	2,962,000
Proprietary, core and licensed technology		8.57		5,145,000		1,554,000		3,591,000
Other		5.23		834,000		532,000		302,000

Total			$	18,435,000		11,580,000	$	6,855,000

Amortization expense for the three months ended January 31, 2007 and 2006 was $679,000 and $603,000, respectively. Amortization expense for the six months ended January 31, 2007 and 2006 was $1,328,000 and $1,199,000, respectively. The estimated amortization expense for the twelve months ending January 31, 2008, 2009, 2010, 2011 and 2012 is $1,877,000, $1,303,000, $1,231,000, $1,082,000 and $623,000, respectively.

The changes in carrying amount of goodwill by segment for the six months ended January 31, 2007 are as follows:


	Telecommunications Transmission		Mobile Data Communications		RF Microwave Amplifiers		Total

Balance at July 31, 2006	$	8,817,000		5,005,000		8,422,000	$	22,244,000
Acquisition of Insite (See Note 5)		—		2,143,000		—		2,143,000

Balance at January 31, 2007	$	8,817,000		7,148,000		8,422,000	$	24,387,000


(14)	Legal Proceedings


	The Company is subject to certain 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 position or results of operations.
	During fiscal 2005, two of the Company’s leased facilities located in Florida experienced hurricane damage to both leasehold improvements and personal property. As of January 31, 2007, the Company has completed all restoration efforts relating to the hurricane damage and has recorded an $816,000 insurance recovery receivable and accrued a total of $2,240,000 for hurricane related costs. Despite a written agreement with the general contractor that the Company believes limits its liability for the cost of the repairs to the amount of insurance proceeds ultimately received from its insurance company, a dispute has arisen with the general contractor and a certain subcontractor over the subcontractor’s demand for payment directly from the Company (by virtue of a purported assignment of rights and other grounds) in an amount exceeding the insurance proceeds by $816,000, plus late charges, interest, fees, costs and certain treble damages. As a result of this dispute, the Company deposited $1,422,000, representing the balance of the insurance proceeds it has received, in its attorneys’ trust account and filed a complaint for declaratory judgment in the 9th Judicial Circuit Court for Orange County, Florida. The general contractor and the subcontractor have filed separate and independent actions against the Company and its insurance company, all of which have now been consolidated under the Company’s original action. The Company has also filed a cross-claim against its insurance company. The original trial date of February 13, 2007 has been postponed, and no new trial date has been scheduled. The Company does not expect that the outcome of this matter will have a material effect on its consolidated financial position.


(15)	Recent Accounting Pronouncements


	On February 15, 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. The Company is not yet in a position to determine what, if any, effects SFAS No. 159 will have on its 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). SFAS No. 157 will be effective for the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact SFAS No. 157 will have on its consolidated financial statements.
	In September 2006, the SEC issued SAB No. 108 (“SAB No. 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB No. 108 must be applied prior to the end of the Company’s fiscal year ending July 31, 2007. The Company has commenced the process of evaluating the potential effects of SAB No. 108 on its consolidated financial statements and is not yet in a position to determine what, if any, effect SAB No. 108 will have on its consolidated financial statements.
	In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law and prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not threshold. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 is effective beginning in the Company’s first quarter of fiscal 2008. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company has commenced the process of evaluating the potential effects of FIN 48 on its consolidated financial statements and is not yet in a position to determine what, if any, effect FIN 48 will have on its consolidated financial statements.


(16)	Condensed Consolidating Financial Information

	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. Comtech Tolt Technologies, Inc. (“Tolt”) is included in the guarantor column for all periods presented and, in August 2006, its operations were combined with Comtech Mobile Datacom Corporation. In November 2006, Comtech Vipersat, Inc. was merged into Comtech EF Data Corp. 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, 2007:


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiary		Consolidating Entries			Consolidated Total

Assets
Current assets:
Cash and cash equivalents	$	261,236,000			2,664,000		2,314,000		—		$	266,214,000
Accounts receivable, net		—			67,180,000		1,520,000		—			68,700,000
Inventories, net		—			73,816,000		—		—			73,816,000
Prepaid expenses and other current assets		1,407,000			3,963,000		306,000		—			5,676,000
Deferred tax asset – current		598,000			7,607,000		—		—			8,205,000

Total current assets		263,241,000			155,230,000		4,140,000		—			422,611,000

Property, plant and equipment, net		867,000			24,522,000		671,000		—			26,060,000
Investment in subsidiaries		216,826,000			5,452,000		—		(222,278,000	)		—
Goodwill		—			23,440,000		947,000		—			24,387,000
Intangibles with finite lives, net		—			5,442,000		834,000		—			6,276,000
Deferred tax asset – non-current		—			—		174,000		(174,000	)		—
Deferred financing costs, net		2,176,000			—		—		—			2,176,000
Other assets, net		56,000			354,000		21,000		—			431,000
Intercompany receivables		—			69,778,000		—		(69,778,000	)		—

Total assets	$	483,166,000			284,218,000		6,787,000		(292,230,000	)	$	481,941,000


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	692,000			18,609,000		252,000		—		$	19,553,000
Accrued expenses and other current liabilities		5,015,000			32,613,000		498,000		—			38,126,000
Customer advances and deposits		—			9,104,000		43,000		—			9,147,000
Deferred service revenue		—			4,906,000		—		—			4,906,000
Current installments of other obligations		—			129,000		—		—			129,000
Interest payable		1,050,000			—		—		—			1,050,000
Income taxes payable		5,560,000			—		25,000		—			5,585,000

Total current liabilities		12,317,000			65,361,000		818,000		—			78,496,000

Convertible senior notes		105,000,000			—		—		—			105,000,000
Other obligations, less current installments		—			177,000		—		—			177,000
Deferred tax liability – non-current		4,912,000			1,854,000		—		(174,000	)		6,592,000
Intercompany payables		69,261,000			—		517,000		(69,778,000	)		—

Total liabilities		191,490,000			67,392,000		1,335,000		(69,952,000	)		190,265,000

Commitments and contingencies

Stockholders’ equity:
Preferred stock		—			—		—		—			—
Common stock		2,335,000			4,000		—		(4,000	)		2,335,000
Additional paid-in capital		147,893,000			81,410,000		5,187,000		(86,597,000	)		147,893,000
Retained earnings		141,633,000			135,412,000		265,000		(135,677,000	)		141,633,000

		291,861,000			216,826,000		5,452,000		(222,278,000	)		291,861,000
Less:
Treasury stock		(185,000	)		—		—		—			(185,000	)

Total stockholders’ equity		291,676,000			216,826,000		5,452,000		(222,278,000	)		291,676,000

Total liabilities and stockholders’ equity	$	483,166,000			284,218,000		6,787,000		(292,230,000	)	$	481,941,000

The following reflects the condensed consolidating balance sheet as of July 31, 2006:


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiary		Consolidating Entries			Consolidated Total

Assets
Current assets:
Cash and cash equivalents	$	238,298,000			9,949,000		3,340,000		—		$	251,587,000
Restricted cash		—			1,003,000		—		—			1,003,000
Accounts receivable, net		—			66,025,000		4,022,000		—			70,047,000
Inventories, net		—			61,043,000		—		—			61,043,000
Prepaid expenses and other current assets		1,101,000			5,565,000		512,000		—			7,178,000
Deferred tax asset – current		551,000			7,040,000		—		—			7,591,000

Total current assets		239,950,000			150,625,000		7,874,000		—			398,449,000

Property, plant and equipment, net		914,000			23,295,000		523,000		—			24,732,000
Investment in subsidiaries		191,046,000			5,496,000		—		(196,542,000	)		—
Goodwill		—			21,297,000		947,000		—			22,244,000
Intangibles with finite lives, net		—			5,933,000		922,000		—			6,855,000
Deferred tax asset – non-current		—			—		174,000		(174,000	)		—
Deferred financing costs, net		2,449,000			—		—		—			2,449,000
Other assets, net		56,000			459,000		22,000		—			537,000
Intercompany receivables		—			59,824,000		—		(59,824,000	)		—

Total assets	$	434,415,000			266,929,000		10,462,000		(256,540,000	)	$	455,266,000


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	390,000			27,497,000		450,000		—		$	28,337,000
Accrued expenses and other current liabilities		6,683,000			32,806,000		1,741,000		—			41,230,000
Customer advances and deposits		—			3,502,000		42,000		—			3,544,000
Deferred service revenue		—			9,896,000		—		—			9,896,000
Current installments of other obligations		—			154,000		—		—			154,000
Interest payable		1,050,000			—		—		—			1,050,000
Income taxes payable		4,428,000			—		824,000		—			5,252,000

Total current liabilities		12,551,000			73,855,000		3,057,000		—			89,463,000

Convertible senior notes		105,000,000			—		—		—			105,000,000
Other obligations, less current installments		—			243,000		—		—			243,000
Deferred tax liability – non-current		4,707,000			1,785,000		—		(174,000	)		6,318,000
Intercompany payables		57,915,000			—		1,908,000		(59,823,000	)		—

Total liabilities		180,173,000			75,883,000		4,965,000		(59,997,000	)		201,024,000

Commitments and contingencies

Stockholders’ equity:
Preferred stock		—			—		—		—			—
Common stock		2,305,000			4,000		—		(4,000	)		2,305,000
Additional paid-in capital		139,487,000			81,410,000		5,187,000		(86,597,000	)		139,487,000
Retained earnings		112,635,000			109,632,000		310,000		(109,942,000	)		112,635,000

		254,427,000			191,046,000		5,497,000		(196,543,000	)		254,427,000
Less:
Treasury stock		(185,000	)		—		—		—			(185,000	)

Total stockholders’ equity		254,242,000			191,046,000		5,497,000		(196,543,000	)		254,242,000

Total liabilities and stockholders’ equity	$	434,415,000			266,929,000		10,462,000		(256,540,000	)	$	455,266,000

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


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidating Entries			Consolidated Total


Net sales	$	—			109,833,000			1,630,000			(80,000	)	$	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 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

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


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidating Entries			Consolidated Total


Net sales	$	—			94,086,000			1,722,000			(67,000	)	$	95,741,000
Cost of sales		—			53,884,000			833,000			(67,000	)		54,650,000

Gross profit		—			40,202,000			889,000			—			41,091,000


Expenses:
Selling, general and administrative		—			15,027,000			782,000			—			15,809,000
Research and development		—			5,630,000			377,000			—			6,007,000
Amortization of intangibles		—			559,000			44,000			—			603,000

		—			21,216,000			1,203,000			—			22,419,000


Operating income (loss)		—			18,986,000			(314,000	)		—			18,672,000

Other expense (income):
Interest expense		661,000			11,000			—			—			672,000
Interest income and other		(2,175,000	)		3,000			—			—			(2,172,000	)


Income (loss) before income taxes and equity in undistributed earnings (loss) of subsidiaries		1,514,000			18,972,000			(314,000	)		—			20,172,000
Provision for (benefit from) income taxes		563,000			6,403,000			(98,000	)		—			6,868,000

Net earnings (loss) before equity in undistributed earnings (loss) of subsidiaries		951,000			12,569,000			(216,000	)		—			13,304,000
Equity in undistributed earnings (loss) of subsidiaries		12,353,000			(216,000	)		—			(12,137,000	)		—


Net income (loss)	$	13,304,000			12,353,000			(216,000	)		(12,137,000	)	$	13,304,000

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


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidating Entries			Consolidated Total


Net sales	$	—			203,133,000			5,555,000			(235,000	)	$	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 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

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


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidating Entries			Consolidated Total


Net sales	$	—			199,145,000			3,273,000			(110,000	)	$	202,308,000
Cost of sales		—			119,686,000			1,437,000			(110,000	)		121,013,000

Gross profit		—			79,459,000			1,836,000			—			81,295,000


Expenses:
Selling, general and administrative		—			30,364,000			1,493,000			—			31,857,000
Research and development		—			12,090,000			666,000			—			12,756,000
Amortization of intangibles		—			1,111,000			88,000			—			1,199,000

		—			43,565,000			2,247,000			—			45,812,000


Operating income (loss)		—			35,894,000			(411,000	)		—			35,483,000

Other expense (income):
Interest expense		1,323,000			23,000			—			—			1,346,000
Interest income and other		(3,995,000	)		31,000			17,000			—			(3,947,000	)


Income (loss) before income taxes and equity in undistributed earnings (loss) of subsidiaries		2,672,000			35,840,000			(428,000	)		—			38,084,000
Provision for (benefit from) income taxes		994,000			12,457,000			(135,000	)		—			13,316,000

Net earnings (loss) before equity in undistributed earnings (loss) of subsidiaries		1,678,000			23,383,000			(293,000	)		—			24,768,000
Equity in undistributed earnings (loss) of subsidiaries		23,090,000			(293,000	)		—			(22,797,000	)		—


Net income (loss)	$	24,768,000			23,090,000			(293,000	)		(22,797,000	)	$	24,768,000

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


	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiary			Consolidating Entries			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