Comtech Telecommunications (CMTL) 10-Q 2005 Q2 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, 2005
|_|	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)
105 Baylis Road, Melville, New York	11747
(Address of principal executive offices)	(Zip Code)
(631) 777-8900
(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   |_|  No

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of March 4, 2005, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 14,436,919 shares.

COMTECH TELECOMMUNICATIONS CORP.
INDEX

	Page
PART I.   FINANCIAL INFORMATION
Item 1.  Financial Statements
Consolidated Balance Sheets – January 31, 2005 (Unaudited)
and July 31, 2004	2
Consolidated Statements of Operations – Three and Six Months Ended
January 31, 2005 and 2004 (Unaudited)	3
Consolidated Statements of Cash Flows – Six Months Ended January 31, 2005
and 2004 (Unaudited)	4
Notes to Consolidated Financial Statements	5 - 12
Item 2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations	12 - 20
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.  Controls and Procedures	20
PART II.  OTHER INFORMATION
Item 4.  Submission of Matters to a Vote of Security Holders	21
Item 6.  Exhibits	21
Signature Page	22
Certifications	23 - 26

1

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

Item 1.	January 31, 2005			July 31, 2004
Assets		(Unaudited)
Current assets:
Cash and cash equivalents	$	201,743,000			163,292,000
Restricted cash		1,044,000			4,054,000
Accounts receivable, net		41,412,000			43,002,000
Inventories, net		38,555,000			39,758,000
Prepaid expenses and other current assets		5,107,000			1,817,000
Deferred tax asset – current		6,501,000			6,501,000
Total current assets		294,362,000			258,424,000
Property, plant and equipment, net		15,450,000			14,652,000
Goodwill		18,721,000			18,721,000
Intangibles with definite lives, net		9,569,000			10,706,000
Deferred financing costs, net		3,267,000			3,541,000
Other assets, net		413,000			346,000
Total assets	$	341,782,000			306,390,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	16,808,000			9,566,000
Accrued expenses		24,264,000			20,515,000
Customer advances and deposits		11,045,000			7,290,000
Deferred service revenue		10,248,000			13,716,000
Current installments of capital lease obligations		162,000			234,000
Interest payable		1,050,000			1,073,000
Income taxes payable		9,885,000			4,812,000
Total current liabilities		73,462,000			57,206,000
Convertible senior notes		105,000,000			105,000,000
Capital lease obligations, less current installments		90,000			158,000
Deferred tax liability – non-current		1,628,000			1,628,000
Total liabilities		180,180,000			163,992,000
Stockholders’ equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000		—			—
Common stock, par value $.10 per share; authorized 30,000,000 shares;
issued 14,562,794 shares at January 31, 2005 and 14,371,335 shares
at July 31, 2004		1,456,000			1,437,000
Additional paid-in capital		112,362,000			110,435,000
Retained earnings		47,969,000			30,711,000
		161,787,000			142,583,000
Less:
Treasury stock (140,625 shares)		(185,000	)		(185,000	)
Total stockholders’ equity		161,602,000			142,398,000
Total liabilities and stockholders’ equity	$	341,782,000			306,390,000
Commitments and contingencies

See accompanying notes to consolidated financial statements.

2

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

	Three months ended January 31,						Six months ended January 31,
	2005			2004			2005			2004
Net sales	$	78,087,000			56,794,000			134,209,000			113,090,000
Cost of sales		45,797,000			36,181,000			74,798,000			71,497,000
Gross profit		32,290,000			20,613,000			59,411,000			41,593,000
Expenses:
Selling, general and administrative		12,033,000			8,804,000			23,257,000			17,378,000
Research and development		4,954,000			3,664,000			9,850,000			7,205,000
Amortization of intangibles		568,000			499,000			1,137,000			999,000
		17,555,000			12,967,000			34,244,000			25,582,000
Operating income		14,735,000			7,646,000			25,167,000			16,011,000
Other expense (income):
Interest expense		667,000			51,000			1,336,000			75,000
Interest income		(905,000	)		(114,000	)		(1,548,000	)		(219,000	)
Income before provision for income taxes		14,973,000			7,709,000			25,379,000			16,155,000
Provision for income taxes		4,791,000			2,466,000			8,121,000			5,169,000
Net income	$	10,182,000			5,243,000			17,258,000			10,986,000
Net income per share (See Note 7):
Basic	$	0.71			0.37			1.21			0.78
Diluted	$	0.59			0.34			1.02			0.71
Weighted average number of common shares
outstanding – basic		14,324,000			14,080,000			14,294,000			14,017,000
Weighted average number of common and
common equivalent shares outstanding
assuming dilution – diluted		18,014,000			15,671,000			17,838,000			15,517,000

See accompanying notes to consolidated financial statements.

3

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

	Six months ended January 31,
	2005			2004
Cash flows from operating activities:
Net income	$	17,258,000			10,986,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization		3,666,000			3,116,000
Amortization of deferred financing costs		274,000			8,000
Provision for doubtful accounts		21,000			142,000
Provision for excess and obsolete inventories		792,000			836,000
Income tax benefit from stock option exercises		526,000			1,001,000
Loss on disposal of property, plant and equipment		—			81,000
Changes in assets and liabilities:
Restricted cash securing letter of credit obligations		3,010,000			92,000
Accounts receivable		1,569,000			(21,172,000	)
Inventories		426,000			1,441,000
Prepaid expenses and other current assets		(3,259,000	)		(1,116,000	)
Other assets		(67,000	)		(2,000	)
Accounts payable		7,242,000			2,445,000
Accrued expenses		3,749,000			2,035,000
Customer advances and deposits		3,755,000			403,000
Deferred service revenue		(3,468,000	)		1,590,000
Interest payable		(23,000	)		29,000
Income taxes payable		5,073,000			(2,166,000	)
Net cash provided by (used in) operating activities		40,544,000			(251,000	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(3,373,000	)		(2,420,000	)
Net cash used in investing activities		(3,373,000	)		(2,420,000	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(140,000	)		(518,000	)
Proceeds from issuance of convertible senior notes, net of
related costs of $3,821,000		—			101,179,000
Proceeds from exercises of stock options, warrants and employee stock
purchase plan shares		1,420,000			1,617,000
Net cash provided by financing activities		1,280,000			102,278,000
Net increase in cash and cash equivalents		38,451,000			99,607,000
Cash and cash equivalents at beginning of period		163,292,000			48,617,000
Cash and cash equivalents at end of period	$	201,743,000			148,224,000
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	1,073,000			39,000
Income taxes	$	2,522,000			6,334,000

See accompanying notes to consolidated financial statements.

4

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

(1)	General
	The accompanying consolidated financial statements at and for the three and six months ended January 31, 2005 and 2004 are unaudited. In the opinion of management, the information furnished reflects all adjustments necessary for a fair presentation of the results for the unaudited interim periods. During the three and six months ended January 31, 2005, the Company recorded positive adjustments relating to its estimated gross profit and progress toward completion on three long-term contracts accounted for using the percentage-of-completion method. The results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full year.
	These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2004 and the notes thereto contained in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and all of the Company’s other filings with the Securities and Exchange Commission.

(2)	Reclassifications
	Certain reclassifications have been made to previously reported statements to conform to the Company’s current financial statement format.
(3)	Accounts Receivable

Accounts receivable consist of the following:	January 31, 2005		July 31, 2004
Accounts receivable from commercial customers	$	17,996,000		27,845,000
Unbilled receivables (including retainages) on
contracts-in-progress		8,998,000		6,684,000
Amounts receivable from the U.S. government
and its agencies		15,120,000		9,205,000
		42,114,000		43,734,000
Less allowance for doubtful accounts		702,000		732,000
Accounts receivable, net	$	41,412,000		43,002,000

	There was $2,114,000 of retainage included in unbilled receivables at January 31, 2005. In the opinion of management, substantially all of the unbilled balances will be billed and collected within one year.
	As of July 31, 2004, a North African country represented 34.4% of total net accounts receivable.
(4)	Inventories

Inventories consist of the following:	January 31, 2005		July 31, 2004
Raw materials and components	$	24,201,000		22,502,000
Work-in-process and finished goods		20,292,000		22,878,000
		44,493,000		45,380,000
Less reserve for excess and obsolete inventories		5,938,000		5,622,000
Inventories, net	$	38,555,000		39,758,000

Inventories directly related to long-term contracts were $4,671,000 and $8,555,000 at January 31, 2005 and July 31, 2004, respectively.

5

(5)	Accrued Expenses
	Accrued expenses consist of the following:

	January 31, 2005		July 31, 2004
Accrued wages and benefits	$	9,791,000		9,972,000
Accrued commissions		2,727,000		3,255,000
Accrued warranty		5,675,000		4,990,000
Accrued hurricane-related costs (See Note 11)		3,274,000		—
Other		2,797,000		2,298,000
	$	24,264,000		20,515,000

The Company provides standard 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. Changes in the Company’s product warranty liability during the six months ended January 31, 2005 and 2004 were as follows:

	Six months ended January 31,
	2005			2004
Balance at beginning of period	$	4,990,000			3,139,000
Provision for warranty obligations		1,926,000			2,026,000
Charges incurred		(1,241,000	)		(1,351,000	)
Balance at end of period	$	5,675,000			3,814,000

(6)	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 of 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.
	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 $47.25 per share (a conversion rate of 21.1640 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 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. As of January 31, 2005, all of the Company’s subsidiaries have issued full and unconditional guarantees in favor of the holders of the Company’s 2.0% convertible senior notes, except for the subsidiary that, in May 2004, purchased certain assets and assumed certain liabilities of Memotec, Inc. (the “Memotec Subsidiary”). The Memotec Subsidiary’s total assets, equity, net sales, income from continuing operations before income taxes and cash flows from operating activities were less than 3% of the corresponding consolidated amounts for the six months ended January 31, 2005 and are expected to be less than 3% for the full fiscal year ending July 31, 2005. These full and unconditional guarantees are joint and several. Other than supporting the operations of its subsidiaries, Comtech Telecommunications Corp. (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.

6

(7)	Earnings Per Share
	The Company calculates earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“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 warrants, if dilutive, and convertible senior notes outstanding during each period.
	Stock options to purchase 7,000 shares for the three months ended January 31, 2005 were not included in the diluted EPS calculation because their effect would have been anti-dilutive. For the three months ended January 31, 2004, all outstanding options were included in the calculation of diluted EPS.
	Stock options to purchase 59,000 and 1,000 shares for the six months ended January 31, 2005 and 2004, respectively, were not included in the diluted 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 Debt on Diluted Earnings Per Share,” the Company has (i) included the impact of the assumed conversion of its 2.0% convertible senior notes in calculating diluted EPS commencing in the fiscal quarter ended January 31, 2005 and (ii) restated prior periods’ diluted EPS for comparative purposes.
	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,
	2005		2004		2005		2004
Numerator:
Net income for basic calculation	$	10,182,000		5,243,000		17,258,000		10,986,000
Effect of dilutive securities:
Interest expense (net of tax) on
convertible senior notes		450,000		25,000		900,000		25,000
Numerator for diluted calculation	$	10,632,000		5,268,000		18,158,000		11,011,000
Denominator:
Denominator for basic calculation		14,324,000		14,080,000		14,294,000		14,017,000
Effect of dilutive securities:
Stock options		1,468,000		1,468,000		1,322,000		1,438,000
Conversion of convertible
senior notes		2,222,000		123,000		2,222,000		62,000
Denominator for diluted calculation		18,014,000		15,671,000		17,838,000		15,517,000

(8)

Stock-Based Compensation Plans

The Company accounts for its stock option and employee stock purchase plans under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and as a result, no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), the Company’s net income and income per share would have been reduced to the following pro forma amounts:

7

	Three months ended January 31,						Six months ended January 31,
	2005			2004			2005			2004
Net income, as reported	$	10,182,000			5,243,000			17,258,000			10,986,000
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects		(535,000	)		(361,000	)		(1,077,000	)		(704,000	)
Pro forma net income	$	9,647,000			4,882,000			16,181,000			10,282,000
Net income per share:
As reported       Basic	$	0.71			0.37			1.21			0.78
Diluted	$	0.59			0.34			1.02			0.71
Pro forma           Basic	$	0.67			0.35			1.13			0.73
Diluted	$	0.56			0.31			0.96			0.66

The per share weighted average fair value of stock options granted during the three months ended January 31, 2005 and 2004 was $18.73 and $18.22, respectively, on the date of grant. These fair values were determined using the Black Scholes option-pricing model with the following weighted average assumptions: 2005 – expected dividend yield of 0%, risk free interest rate of 3.60%, expected volatility of 62.37%, and an expected life of 5 years; 2004 – expected dividend yield of 0%, risk free interest rate of 3.34%, expected volatility of 70.30%, and an expected life of 5 years.

The per share weighted average fair value of stock options granted during the six months ended January 31, 2005 and 2004 was $11.66 and $8.85, respectively, on the date of grant. These fair values were determined using the Black Scholes option-pricing model with the following weighted average assumptions: 2005 – expected dividend yield of 0%, risk free interest rate of 3.66%, expected volatility of 65.61%, and an expected life of 5 years; 2004 – expected dividend yield of 0%, risk free interest rate of 3.26%, expected volatility of 48.53%, and an expected life of 5 years.

(9)	Segment and Principal Customer 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 operating decisions and assessing 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 segments: (i) telecommunications transmission, (ii) mobile data communications and (iii) RF microwave amplifiers. Telecommunications transmission products include analog and digital modems, frequency converters, power amplifiers, satellite VSAT transceivers and antennas, voice gateways and over-the-horizon microwave communications products and systems. Mobile data communications provide satellite-based mobile tracking and messaging hardware and related services. RF microwave amplifier products include solid-state high-power amplifier products and systems that use the microwave and radio frequency spectrums. Unallocated assets consist principally of cash, deferred financing costs and deferred tax assets. Unallocated expenses result from such corporate expenses as legal, accounting and executive. Interest expense associated with the Company’s 2.0% convertible senior notes is not allocated to the operating segments. 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. Intersegment sales for the three months ended January 31, 2005 and 2004 by the telecommunications transmission segment to the RF microwave amplifiers segment were $2,735,000 and $452,000, respectively. Intersegment sales for the six months ended January 31, 2005 and 2004 by the telecommunications transmission segment to the RF microwave amplifiers segment were $4,525,000 and $1,081,000 million, respectively. For the three months ended January 31, 2005 and 2004, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $8,812,000 and $5,338,000, respectively. For the six months ended January 31, 2005 and 2004, intersegment sales by the telecommunications transmission segment to the mobile data communications segment were $11,439,000 and $6,911,000, respectively. Intersegment sales have been eliminated from the tables below.

8

Three months ended
January 31, 2005
(in thousands)

	Telecommunications Transmission		Mobile Data Communications		RF Microwave Amplifiers		Unallocated			Total
Net sales	$	39,650		29,807		8,630		—			78,087
Operating income (expense)		9,247		6,697		912		(2,121	)		14,735
Interest income		63		1		—		841			905
Interest expense		2		—		3		662			667
Depreciation and amortization		1,333		178		318		23			1,852
Expenditures for long-lived
assets, including intangibles		1,092		209		270		7			1,578
Total assets		84,624		26,888		21,615		208,655			341,782

Three months ended
January 31, 2004
(in thousands)

	Telecommunications Transmission		Mobile Data Communications		RF Microwave Amplifiers		Unallocated			Total
Net sales	$	33,704		18,362		4,728		—			56,794
Operating income (expense)		6,586		2,595		301		(1,836	)		7,646
Interest income		12		—		—		102			114
Interest expense		8		—		6		37			51
Depreciation and amortization		1,171		90		272		21			1,554
Expenditures for long-lived
assets, including intangibles		1,049		73		48		19			1,189
Total assets		81,443		27,683		19,670		157,886			286,682

Six months ended
January 31, 2005
(in thousands)

	Telecommunications Transmission		Mobile Data Communications		RF Microwave Amplifiers		Unallocated			Total
Net sales	$	77,152		39,487		17,570		—			134,209
Operating income (expense)		19,220		7,905		2,027		(3,985	)		25,167
Interest income		79		1		—		1,468			1,548
Interest expense		6		—		7		1,323			1,336
Depreciation and amortization		2,650		348		631		37			3,666
Expenditures for long-lived
assets, including intangibles		2,222		703		423		25			3,373
Total assets		84,624		26,888		21,615		208,655			341,782

Six months ended
January 31, 2004
(in thousands)

	Telecommunications Transmission		Mobile Data Communications		RF Microwave Amplifiers		Unallocated			Total
Net sales	$	68,793		34,677		9,620		—			113,090
Operating income (expense)		13,791		5,124		487		(3,391	)		16,011
Interest income		21		3		—		195			219
Interest expense		26		—		12		37			75
Depreciation and amortization		2,313		212		543		48			3,116
Expenditures for long-lived
assets, including intangibles		2,138		175		88		19			2,420
Total assets		81,443		27,683		19,670		157,886			286,682

9

For the three months ended January 31, 2005 and 2004, approximately 51.8% and 42.9%, respectively, of the Company’s consolidated net sales resulted from contracts with the U.S. government or prime contractors to the U.S. government. During the six months ended January 31, 2005 and 2004, approximately 46.4% and 41.7%, respectively, of the Company’s consolidated net sales resulted from contracts with the U.S. government or prime contractors to the U.S. government.

Except for sales to the U.S. government, no customer represented 10% or more of consolidated net sales in the three and six months ended January 31, 2005. During the three months ended January 31, 2004, sales to one customer, a prime contractor, represented 26.5% of consolidated net sales. Sales to the same customer for the six months ended January 31, 2004 were 23.3% of consolidated net sales.

International sales comprised 37.6% and 43.8% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively. International sales comprised 41.5% and 43.5% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively. International sales include sales to domestic companies for inclusion in products which will be sold to international customers.

Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during the three and six months ended January 31, 2005 represented 12.4% and 10.8%, respectively, of consolidated net sales. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during the three and six months ended January 31, 2004 represented 15.1% and 16.0%, respectively, of consolidated net sales.

(10)	Intangible Assets
	Intangibles with definite lives arising from acquisitions as of January 31, 2005 and July 31, 2004 are as follows:

	January 31, 2005				July 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Existing technology	$	12,456,000		6,867,000		12,456,000		5,992,000
Core technology		2,135,000		442,000		2,135,000		318,000
Customer relationships		260,000		28,000		260,000		9,000
Technology license		2,229,000		368,000		2,229,000		314,000
Trade names		225,000		56,000		225,000		41,000
Order backlog		188,000		163,000		188,000		113,000
Total	$	17,493,000		7,924,000		17,493,000		6,787,000

Amortization expense for the six months ended January 31, 2005 and 2004 was $1,137,000 and $999,000, respectively. The estimated amortization expense for the twelve months ending January 31, 2006, 2007, 2008, 2009 and 2010 is $2,214,000, $2,189,000, $1,366,000, $817,000 and $752,000, respectively.

Goodwill by reporting unit as of January 31, 2005 are as follows:

Telecommunications transmission	$	8,865,000
RF microwave amplifiers		8,422,000
Mobile data communications		1,434,000
	$	18,721,000

(11)

Impact of  Hurricanes

During the first quarter of 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, 2005, the Company has received $1,452,000 in advances from its insurance carrier, of which $452,000 was received in the second quarter of fiscal 2005. At January 31, 2005, the Company has a $2,101,000 insurance recovery receivable which is included in the caption “Prepaid expenses and other current assets” in the accompanying consolidated balance sheet. For the three and six months ended January 31, 2005, the Company recorded $32,000 and $432,000, respectively, of hurricane-related expenses, net of insurance recoveries, in the caption “Selling, general and

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administrative expenses” in the accompanying consolidated statement of operations. The Company is continuing its efforts to work with both the insurance carrier and each landlord in assessing the final costs to repair and clean up each facility. Other than minor disruptions, the hurricane damage and restoration efforts did not materially impact the Company’s ability to meet its customers’ demands or contractual commitments.

(12)	Recent Accounting Pronouncements
	In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”). This statement replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such cost be based on fair value. SFAS No. 123(R) will be effective for the Company’s first quarter of fiscal 2006. While the Company currently provides the pro forma disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” on a quarterly basis (see Note 8), it is currently evaluating the impact this statement and our transition to this statement will have on its consolidated financial statements.
	In December 2004, the FASB issued Staff Position No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP No. 109-1”). This staff position provides accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 that was signed into law in October 2004. FSP No. 109-1 states that (i) the special tax relief for domestic manufacturing activities be accounted for as a tax deduction (instead of a tax rate reduction), and (ii) a company’s recorded deferred tax assets and liabilities should not be adjusted for the impact of this special tax relief. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
	In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of Accounting Research Bulletin No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 requires all companies to recognize a current period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for the Company’s fiscal year 2006. The Company is currently evaluating the impact this statement will have on its consolidated financial statements.

(13)

Subsequent Events

Acquisition In February 2005, the Company acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. (“Tolt”). Tolt, which is based in Gig Harbor, Washington, has significant experience in providing turnkey employee mobility solutions to large enterprises, including hands-on experience with customers that have trucking fleets. The purchase price of the business was $3,500,000 ($2,500,000 at closing plus two payments of $500,000 each) plus an earn-out of $500,000 based on the achievement of fiscal 2006 sales goals. Tolt’s sales for 2004 were approximately $17,000,000. Beginning with the third quarter of fiscal 2005, the results of operations of Tolt will be included in the Company’s mobile data communications segment.

Three-for-Two Stock Split
On March 8, 2005, the Company’s Board of Directors approved a three-for-two stock split of the Company’s common shares to be effected in the form of a stock dividend. The additional shares will be issued on April 4, 2005 to stockholders of record at the close of business on March 21, 2005. Cash will be distributed in lieu of any fractional shares. Other than in this subsequent event footnote, the financial information in this Form 10-Q has not been adjusted for the stock split. The Company’s net income per share and weighted average common shares outstanding on a post-split basis would be as follows:

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	Three months ended January 31,				Six months ended January 31,
	2005		2004		2005		2004
Net income per share
Basic	$	0.47		0.25		0.80		0.52
Diluted	$	0.39		0.22		0.68		0.47
Weighted average number of common shares
outstanding – basic		21,486,000		21,120,000		21,441,000		21,026,000
Weighted average number of common and
common equivalent shares outstanding
assuming dilution – diluted		27,021,000		23,507,000		26,757,000		23,276,000

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

We design, develop, produce and market innovative products, systems and services for advanced communications solutions. We conduct our business through three complementary segments: telecommunications transmission, mobile data communications and RF microwave amplifiers. We sell our products into markets where we believe we have technological, engineering, systems design or other expertise that differentiate our product offerings. We believe we are leaders in the market segments that we serve.

Our telecommunications transmission segment, our largest business segment, provides specialized products and systems for satellite, over-the-horizon microwave and wireless line-of-sight microwave telecommunications systems. Our mobile data communications segment provides satellite-based mobile location, tracking and messaging services and mobile satellite transceivers primarily for defense applications, including logistics, support and battlefield command and control. Our RF microwave amplifier segment designs, manufactures and markets solid-state, high power, broadband RF microwave amplifier products.

A substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of revenues from which cannot be predicted. Quarterly sales and operating results may be significantly affected by one or more of such 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 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 manufacturing of complex electronic equipment to a buyer’s specification or to provide services relating to the performance of such contracts are recognized using the percentage-of completion method. Revenue from contracts that contain multiple elements, that are not accounted for under the percentage-of-completion method, are accounted for in accordance with the Emerging Issues Task Force Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenues from these contracts are allocated to each respective element based on each element’s relative fair value and recognized when the revenue recognition criteria for each element are met.

Our contract with the U.S. Army for the Movement Tracking System is for an eight-year period and revenue recognition is based on the percentage-of-completion method. The gross margin is based on the estimated sales and expenses for the entire eight-year contract. The amount of revenue recognized has been limited to the amount of funded orders received from the U.S. Army. Through our fiscal quarter ended October 31, 2004, we recognized revenue on the portion of such orders that relate to prepaid service time when the time was used by the customer. As a result of recent changes to the manner in which our technology is being deployed and used, commencing in the fiscal quarter ended January 31, 2005, we are recognizing service time revenue based on a network availability method which recognizes prepaid service time on a straight-line basis from the date of shipment through the remainder of the contract term.

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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.

Selling, general and administrative expenses consist primarily of salaries and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and other administrative costs.

Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development effort is related to specific contracts and is recoverable under those contracts because they are funded by the customers. Such customer-funded expenditures are not included in research and development expenses for financial reporting purposes, but are reflected in cost of sales.

In May 2004, we acquired certain assets and assumed certain liabilities of Memotec, Inc. (“Memotec”), a subsidiary of Kontron AG, and at the same time, purchased related inventory owned by Kontron Canada Inc., for an aggregate purchase price of approximately $5.2 million in cash. The results of operations in our telecommunications transmission segment for the three and six months ended January 31, 2005 include the Memotec related business.

In February 2005, we acquired certain assets and assumed certain liabilities of Tolt Technologies, Inc. (“Tolt”) for an aggregate purchase price of $3.5 million ($2.5 million at closing plus two payments of $0.5 million each) plus an earn-out of $0.5 million based on the achievement of fiscal 2006 sales goals. Tolt’s sales for 2004 were approximately $17.0 million. Beginning with the third quarter of fiscal 2005, the results of operations of Tolt will be included in our mobile data communications segment.

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 manufacturing of complex electronic equipment to a buyer’s specification or to provide services relating to the performance of such contracts are recognized using the percentage-of-completion method. Revenue is recognized based on the relationship of total costs incurred to total projected costs, or, alternatively, based on output measures, such as units delivered. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs, including warranty costs, at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. The impact of any such adjustments discussed in“Management’s

Discussion and Analysis of Financial Condition and Results of Operations” represents the cumulative impact of the adjustment on the relevant financial statement amount as of the beginning of the period being discussed. Estimated losses on long-term contracts are recorded in the period in which the losses become known.

Some of our largest contracts, including our contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. 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 and 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 position.

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 position. Historically, we have been able to perform on our long-term contracts.

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Impairment of Intangible Assets.   As of January 31, 2005, our company’s net intangible assets, including goodwill, aggregated $28.3 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.

Provisions for Excess and Obsolete Inventory.  We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. Several factors may influence the sale and use of our inventories, 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 is 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 position.

Allowance for Doubtful Accounts.  We perform ongoing 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 continuously 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 financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial position.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2005 AND JANUARY 31, 2004

Net Sales.   Consolidated net sales were $78.1 million and $56.8 million for the three months ended January 31, 2005 and 2004, respectively, representing an increase of $21.3 million or 37.5%. The increase in net sales was primarily attributable to increased demand for our products in all three business segments.

Net sales in our telecommunications transmission segment were $39.7 million and $33.7 million for the three months ended January 31, 2005 and 2004, respectively, an increase of $6.0 million or 17.8%. The growth in this segment resulted primarily from a significant increase in demand for our satellite earth station products. In addition, sales relating to the Memotec business, which we acquired in May 2004, were $1.4 million for the fiscal quarter ended January 31, 2005. We expect the $77.0 million over-the-horizon microwave system contract that we received in September 2004 to result in increased sales in this product line for the remainder of fiscal 2005, offset in part, by anticipated lower sales from two other large contracts that are nearing completion. The adjustment to the estimated gross margins at completion (see“Gross Profit” below) on these two contracts resulted in $1.3 million of sales for the three months ended January 31, 2005. Our telecommunications transmission segment represented 50.8% and 59.3% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively.

Net sales in our mobile data communications segment were $29.8 million and $18.4 million for the three months ended January 31, 2005 and 2004, respectively, an increase of $11.4 million or 62.0%. The substantial increase in revenues was primarily due to increased demand and continued deployment of our technology by the U.S. Army.

Prior to November 1, 2004, we recognized revenue associated with prepaid service time based on the number of days that our Movement Tracking System (“MTS”) units were used in certain contractually agreed to countries. Iraq was not one of those countries. When MTS units are deployed in Iraq, the customer pays for additional satellite bandwidth separately. MTS units can be deployed in and out of Iraq from various countries (including the contractually agreed to countries). However, regardless of where they are located, the messaging traffic from all MTS units still travels through our network operations centers, which are operated 24 hours a day. Access to and the availability of our network is a significant part of the value in the prepaid service time. During the second quarter of fiscal 2005, we determined, based on discussions with and recent announcements by the U.S. Department of Defense, that the U.S. Army will continue to deploy a substantial number of our MTS units in Iraq. As such, the actual usage of service time days is no longer the most appropriate indicator of our progress toward completion on this revenue stream since the original prepaid service time may never be used for

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those units in Iraq. In addition, the Company currently anticipates that a portion of the prepaid service time for MTS units not currently deployed in Iraq may not be fully used by the end of the contract term. Accordingly, we believe that a network availability method is the most appropriate indicator of our efforts relating to current and future prepaid service time. The network availability method recognizes prepaid service time revenue on a straight-line basis from the date of shipment through the remainder of the contract term. The change to the estimated progress toward completion from applying the network availability method resulted in a $4.6 million increase in revenues for the three months ended January 31, 2005, which represents the cumulative impact of applying this method to the beginning of the MTS contract. Including the impact of this adjustment, our mobile data communications segment represented 38.2% and 32.3% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively.

Net sales in our RF microwave amplifier segment were $8.6 million for the three months ended January 31, 2005, as compared to net sales of $4.7 million for the three months ended January 31, 2004, an increase of $3.9 million or 83.0%. The improvement in this segment’s net sales resulted primarily from increased demand for our defense related products. Our RF microwave amplifier segment represented 11.0% and 8.4% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively.

International sales (which include sales to domestic companies for inclusion in products which are sold to international customers) represented 37.6% and 43.8% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively. Domestic commercial sales represented 10.6% and 13.3% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 51.8% and 42.9% of consolidated net sales for the three months ended January 31, 2005 and 2004, respectively.

Except for sales to the U.S. government, no customer represented 10% or more of consolidated net sales for the three months ended January 31, 2005. During the three months ended January 31, 2004, sales to one customer, a prime contractor, represented 26.5% of consolidated net sales. Direct and indirect sales to a North African country (including sales to the prime contractor mentioned above) during the three months ended January 31, 2005 and 2004, represented 12.4% and 15.1% of consolidated net sales, respectively.

Gross Profit.  Gross profit was $32.3 million and $20.6 million for the three months ended January 31, 2005 and 2004, respectively, representing an increase of $11.7 million. The increase in gross profit was attributable to increased sales, as discussed above, and an increase in our gross margin percentage from 36.3% for the three months ended January 31, 2004 to 41.4% for the three months ended January 31, 2005.

The substantial increase in gross margin, as a percentage of consolidated net sales, was primarily due to (i) increased sales of our satellite earth station products, which typically realize higher margins than sales of our other products, partially offset by a higher percentage of mobile data communications segment sales, which typically realize lower margins than sales of our other products, (ii) increased operating efficiencies, and (iii) the cumulative adjustments discussed below. Excluding the sales and gross profit from prior periods relating to the adjustments, our gross profit as a percentage of sales for the three months ended January 31, 2005 would be 39.6%.

As part of our ongoing operations, we periodically review and adjust total estimated contract revenues and costs on long-term contracts. During the fiscal quarter ended January 31, 2005, we increased the estimated gross profit at completion on two large over-the-horizon microwave system contracts in the telecommunications transmission segment as they continue to draw nearer to completion. In fact, one of the contracts was substantially complete as of January 31, 2005. As a result of increased funding from the U.S. Army, as well as improved operating efficiencies, we also increased the estimated gross profit at completion on the MTS contract. The adjustments, including the impact of the MTS service time adjustment discussed above under“Net Sales,” resulted in an aggregate $3.7 million (of which $2.4 million relates to the mobile data communications segment and $1.3 million relates to the telecommunications transmission segment) cumulative increase to the gross profits recognized on these contracts in prior periods. Such amounts are included in the results of operations for the three months ended January 31, 2005. Further adjustments to the estimated gross profits on long-term contracts are possible in future periods as these contracts are completed.

Included in cost of sales for the three months ended January 31, 2005 and 2004 are provisions for excess and obsolete inventory of $0.4 million and $0.2 million, respectively. As discussed above under“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 usage assumptions and other factors.

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Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $12.0 million and $8.8 million for the three months ended January 31, 2005 and 2004, respectively, representing an increase of $3.2 million. The increase in expenses is primarily attributable to (i) the increased level of sales in all three of our business segments, (ii) expenses associated with the Memotec business that was acquired in May 2004, (iii) the continued initiation of commercial marketing efforts in our mobile data communications segment, and (iv) ongoing costs of compliance with recent corporate governance regulations. As a percentage of consolidated net sales, selling, general and administrative expenses were 15.4% and 15.5% for the three months ended January 31, 2005 and 2004, respectively.

Research and Development Expenses.  Research and development expenses were $5.0 million and $3.7 million for the three months ended January 31, 2005 and 2004, respectively. Approximately $4.4 million and $3.4 million of such amounts, respectively, related to our telecommunications transmission segment. 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, 2005 and 2004, customers reimbursed $1.1 million and $0.5 million, respectively, which is not reflected in the reported research and development expenses, but is included in consolidated net sales with the related costs included in cost of sales.

Amortization of Intangibles.  Amortization of intangibles for the three months ended January 31, 2005 and 2004 was $0.6 million and $0.5 million, respectively. The increase was attributable to the Memotec acquisition in May 2004.

Operating Income.  Operating income for the three months ended January 31, 2005 and 2004 was $14.7 million and $7.6 million, respectively, representing an increase of $7.1 million. The increase was the result of the higher net sales and gross profit, discussed above, partially offset by higher operating expenses.

Operating income in our telecommunications transmission segment increased to $9.2 million for the three months ended January 31, 2005 from $6.6 million for the three months ended January 31, 2004. The increase in operating income was primarily attributable to increased operating efficiencies associated with the increase in net sales, as well as a more favorable product mix. The cumulative gross profit adjustment discussed above under “Gross Profit” contributed $1.1 million to operating income.

Operating income in our mobile data communications segment increased to $6.7 million for the three months ended January 31, 2005 from $2.6 million for the three months ended January 31, 2004. The increase in operating income was primarily attributable to the increase in sales and gross profit discussed above, including the impact ($2.2 million on operating income) of the cumulative gross margin adjustment discussed above under “Gross Profit”, which was partially offset by increased operating costs associated with the increase in net sales and the continued initiation of commercial marketing efforts.

Operating income in our RF microwave amplifier segment increased to $0.9 million for the three months ended January 31, 2005 from $0.3 million for the three months ended January 31, 2004. The increase in operating income was primarily attributable to the increase in net sales, discussed above.

Unallocated operating expenses increased to $2.1 million for the three months ended January 31, 2005 from $1.8 million for the three months ended January 31, 2004, due primarily to increased costs in connection with recent corporate governance regulations and compensation expense.

Interest Expense.  Interest expense increased from $51,000 for the three months ended January 31, 2004 to $0.7 million for the three months ended January 31, 2005. Interest expense for the three months ended January 31, 2005 primarily represents interest expense associated with our 2.0% convertible senior notes issued in January 2004.

Interest Income.  Interest income for the three months ended January 31, 2005 was $0.9 million, as compared to $0.1 million for three months ended January 31, 2004. The $0.8 million increase was due primarily to a higher average cash position resulting primarily from the proceeds received from the issuance of our 2.0% convertible senior notes in January 2004 and cash provided by our operating activities, as well as from an increase in interest rates.

Provision for Income Taxes.  The provision for income taxes was $4.8 million and $2.5 million for the three months ended January 31, 2005 and 2004, respectively, as a result of the significant increase in pre-tax profit. The effective tax rate was 32.0% in both periods.

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COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2005 AND JANUARY 31, 2004

Net Sales.   Consolidated net sales were $134.2 million and $113.1 million for the six months ended January 31, 2005 and 2004, respectively, representing an increase of $21.1 million or 18.7%. The increase in net sales was primarily attributable to increased demand for our products in all three business segments.

Net sales in our telecommunications transmission segment were $77.1 million and $68.8 million for the six months ended January 31, 2005 and 2004, respectively, an increase of $8.3 million or 12.1%. The growth in this segment resulted, in part, from a significant increase in demand for our satellite earth station products. In addition, sales relating to the Memotec business, which we acquired in May 2004, were $3.1 million for the six months ended January 31, 2005. We expect the $77.0 million over-the-horizon microwave system contract that we received in September 2004 to result in increased sales in this product line for the remainder of fiscal 2005, offset in part, by anticipated lower sales from two other large contracts that are nearing completion. The adjustment to the estimated gross profits at completion (see“Gross Profit” above) on these contracts, including the portion recorded in the first quarter of fiscal 2005, resulted in $3.6 million of sales for the six months ended January 31, 2005. Our telecommunications transmission segment represented 57.5% and 60.8% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively.

Net sales in our mobile data communications segment were $39.5 million and $34.7 million for the six months ended January 31, 2005 and 2004, respectively, an increase of $4.8 million or 13.8%. The increase in sales was primarily due to the adjustment discussed above in the three month comparison, which resulted in $3.8 million of sales for the six months ended January 31, 2005. Our mobile data communications segment represented 29.4% and 30.7% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively.

Net sales in our RF microwave amplifier segment were $17.6 million for the six months ended January 31, 2005, as compared to net sales of $9.6 million for the six months ended January 31, 2004, an increase of $8.0 million or 83.3%. The improvement in this segment’s net sales resulted primarily from increased demand for our defense related products. Our RF microwave amplifier segment represented 13.1% and 8.5% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively.

International sales (which include sales to domestic companies for inclusion in products which are sold to international customers) represented 41.5% and 43.5% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively. Domestic commercial sales represented 12.1% and 14.8% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively. Sales to the U.S. government (including sales to prime contractors to the U.S. government) represented 46.4% and 41.7% of consolidated net sales for the six months ended January 31, 2005 and 2004, respectively.

Except for sales to the U.S. government, no customer represented 10% or more of consolidated net sales in the six months ended January 31, 2005. During the six months ended January 31, 2004, sales to one customer, a prime contractor, represented 23.3% of consolidated net sales. Direct and indirect sales to a North African country, including certain sales to the prime contractor mentioned above, during the six months ended January 31, 2005 and 2004 represented 10.8% and 16.0%, respectively, of consolidated net sales.

Gross Profit.  Gross profit was $59.4 million and $41.6 million for the six months ended January 31, 2005 and 2004, respectively, representing an increase of $17.8 million. The increase in gross profit was attributable to the increase in net sales and the gross margin percentage, which increased from 36.8% for the six months ended January 31, 2004 to 44.3% for the six months ended January 31, 2005. The increase in the gross margin, as a percentage of consolidated net sales, was primarily due to (i) increased sales of our satellite earth station products, which typically realize higher margins than sales of our other products, (ii) increased operating efficiencies, and (iii) the impact on gross profit of the cumulative adjustments discussed above aggregating $5.8 million (of which $2.2 million relates to the mobile data communications segment and $3.6 million relates to the telecommunications transmission segment). Excluding the sales and gross profit relating to prior periods from the adjustments, our gross profit as a percentage of sales for the six months ended January 31, 2005 would be 42.3%.

Included in cost of sales for the six months ended January 31, 2005 and 2004 are provisions for excess and obsolete inventory of $0.8 million in both periods. As discussed under“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 usage assumptions and other factors.

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Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $23.3 million and $17.4 million for the six months ended January 31, 2005 and 2004, respectively, representing an increase of $5.9 million. The increase in expenses is primarily attributable to (i) the increased level of net sales in all three of our business segments, (ii) expenses associated with the Memotec business that was acquired in May 2004, (iii) the continued initiation of commercial marketing efforts in our mobile data communications segment, and (iv) ongoing costs of compliance with recent corporate governance regulations. As a percentage of consolidated net sales, selling, general and administrative expenses were 17.4% and 15.4% for the six months ended January 31, 2005 and 2004, respectively.

Research and Development Expenses.  Research and development expenses were $9.9 million and $7.2 million for the six months ended January 31, 2005 and 2004, respectively. Approximately $8.6 million and $6.7 million of such amounts, respectively, related to our telecommunications transmission segment. 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, 2005 and 2004, customers reimbursed us $1.9 million and $1.3 million, respectively, which is not reflected in the reported research and development expenses, but is included in consolidated net sales with the related costs included in cost of sales.

Amortization of Intangibles.  Amortization of intangibles for the six months ended January 31, 2005 and 2004 was $1.1 million and $1.0 million, respectively. The increase was attributable to the Memotec acquisition in May 2004.

Operating Income.  Operating income for the six months ended January 31, 2005 and 2004 was $25.2 million and $16.0 million, respectively. The $9.2 million increase was the result of the higher net sales and gross profit, discussed above, partially offset by higher operating expenses.

Operating income in our telecommunications transmission segment increased to $19.2 million for the six months ended January 31, 2005 from $13.8 million for the six months ended January 31, 2004 as a result of increased operating efficiencies associated with the increase in sales, a more favorable product mix, as well as the impact ($3.1 million on operating income) of the cumulative gross profit adjustments discussed above under “Gross Profit.”

Our mobile data communications segment generated operating income of $7.9 million for the six months ended January 31, 2005 compared to $5.1 million for the six months ended January 31, 2004 as a result of improved operating efficiencies and the impact of the adjustments discussed above ($2.0 million on operating income), partially offset by increased operating costs, including expenses associated with our continued initiation of commercial marketing efforts.

Operating income in our RF microwave amplifier segment increased to $2.0 million for the six months ended January 31, 2005 from $0.5 million for the six months ended January 31, 2004 primarily as a result of the significant increase in net sales.

Unallocated operating expenses increased to $4.0 million for the six months ended January 31, 2005 from $3.4 million for the six months ended January 31, 2004, due primarily to increased costs in connection with recent corporate governance regulations and compensation expense.

Interest Expense.  Interest expense increased from $75,000 for the six months ended January 31, 2004 to $1.3 million for the six months ended January 31, 2005. Interest expense for the six months ended January 31, 2005 primarily represents interest expense associated with our 2.0% convertible senior notes issued in January 2004.

Interest Income.  Interest income for the six months ended January 31, 2005 was $1.5 million, as compared to $0.2 million for the six months ended January 31, 2004. The $1.3 million increase was due primarily to a higher average cash position resulting primarily from the proceeds received from the issuance of our 2.0% convertible senior notes in January 2004 and cash provided by our operating activities, as well as from an increase in interest rates.

Provision for Income Taxes.  The provision for income taxes was $8.1 million and $5.2 million for the six months ended January 31, 2005 and 2004, respectively, as a result of the significant increase in pre-tax profit. The effective tax rate was 32.0% in both periods.

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LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted cash and cash equivalents increased to $201.7 million at January 31, 2005 from $163.3 million at July 31, 2004, representing an increase of $38.4 million. The increase in cash was primarily driven by strong cash flow from operations, partially offset by capital expenditures necessary to support our anticipated future growth.

Net cash provided by operating activities was $40.5 million for the six months ended January 31, 2005. Such amount primarily reflects (i) net income of $17.3 million plus the impact of depreciation and amortization and the provisions for doubtful accounts and inventory reserves aggregating $4.8 million, and (ii) changes in working capital balances.

Net cash used in investing activities for the six months ended January 31, 2005 was $3.4 million, representing capital expenditures. During the first half of the fiscal year, our mobile data communications segment substantially completed the move to its new facility in Germantown, Maryland, including the construction of a state-of-the-art network operations center. During the second half of the year, we expect to expand our high-volume manufacturing center located in Tempe, Arizona. Capital expenditures for the second half of the year are expected to range from $3.0 to $4.0 million.

Net cash provided by financing activities was $1.3 million, due primarily to the proceeds from stock option exercises and employee stock purchase plan shares.

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 of the Securities Act of 1933, as amended. The net proceeds from this transaction were $101.2 million after deducting the initial purchaser’s discount and other transaction costs. For further information concerning this financing, see “Notes to Consolidated Financial Statements – Note (6)2.0% Convertible Senior Notes.”

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, satellite time, and from time to time, technology licenses. We do not expect that these commitments as of January 31, 2005 will materially adversely affect our liquidity.

At January 31, 2005, we had contractual cash obligations to repay our 2.0% convertible senior notes, capital lease and operating lease obligations (including satellite lease expenditures relating to our mobile data communications segment contracts).

Payments due under these long-term obligations are as follows:

	Obligations due by fiscal year (in thousands)
	Total		Remainder of 2005		2006 and 2007		2008 and 2009		After 2009
2.0% convertible senior notes	$	105,000,000		—		—		—		105,000,000
Capital lease obligations		252,000		94,000		158,000		—		—
Operating lease commitments		20,511,000		10,113,000		7,090,000		1,919,000		1,389,000
Total contractual cash
obligations	$	125,763,000		10,207,000		7,248,000		1,919,000		106,389,000

We have entered into standby letter of credit agreements with financial institutions relating to the guarantee of our future performance on certain contracts. At January 31, 2005, the balance of these agreements was $1.2 million. Cash we have pledged against such agreements aggregating $1.0 million has been classified as restricted cash in the consolidated balance sheet as of January 31, 2005.

We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for at least 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.

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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 the future performance and financial condition of the Company, the plans and objectives of the Company’s management and the Company’s assumptions regarding such performance and plans that are forward-looking in nature and involve certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. The Company’s filings with the Securities and Exchange Commission identify many of such risks and uncertainties, which include the following:

• Our operating results being difficult to forecast and subject to volatility;

• Our inability to maintain our government business;

• Our inability to keep pace with technological changes;

• Our dependence on international sales;

• The impact of a domestic and foreign economic slow-down and reduction in telecommunications equipment and systems spending on the demand for our products, systems and services;

• Our mobile data communications business being in an early stage;

• Our backlog being subject to cancellation or modification;

• Our dependence on component availability, subcontractor availability and performance by key suppliers;

• Our fixed price contracts being subject to risk;

• The impact of adverse regulatory changes on our ability to sell products, systems and services;

• The impact of prevailing economic and political conditions on our businesses;

• Whether we can successfully integrate and assimilate the operations of acquired businesses;

• The impact of the loss of key technical or management personnel;

• The highly competitive nature of our markets;

• Our inability to protect our proprietary technology;

• Our operations being subject to environmental regulation;

• The impact of recently enacted and proposed changes in securities laws and regulations on our costs;

• The impact of terrorist attacks and threats, and government responses thereto, and threats of war on our businesses;

• Our inability to satisfy our debt obligations, including the recently issued convertible senior notes;

• The inability to effectuate a change in control of the Company due to provisions of its certificate of incorporation and by-laws, stockholders’ rights plan and Delaware law;

• Our stock price being volatile; and

• Our current intention not to declare or pay any cash dividends.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. If the interest rate the Company receives on its investment of available cash balances were to change by 10%, the effect would be immaterial.

Our 2.0% convertible senior notes bear a fixed rate of interest. As such, our earnings and cash flows are not sensitive to changes in interest rates on our long-term debt.

Item 4.    Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out by the Company under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. This evaluation included our ongoing Sarbanes-Oxley Section 404 Assessment of Internal Controls over Financial Reporting which is required to be completed by the end of fiscal 2005. Based on their 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

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changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II
OTHER INFORMATION

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

At the Company’s Annual Stockholders’ Meeting, held on December 7, 2004, Mr. Fred Kornberg and Mr. Edwin Kantor were elected as Directors for a three-year term. The votes were as follows: Mr. Fred Kornberg – shares for 12,067,191; shares withheld 1,051,673. Mr. Edwin Kantor – shares for 11,957,374; shares withheld 1,161,490. Dr. George Bugliarello and Mr. Richard L. Goldberg continued on as Directors for terms expiring in two years and Mr. Gerard R. Nocita and Mr. Ira Kaplan for terms expiring in one year.

The stockholders ratified the selection of KPMG LLP as the Company’s auditors for its 2005 fiscal year by a vote of 12,231,587 shares for and 875,423 shares against, with 11,854 shares abstaining.

The stockholders approved the adoption of the amendment to the Company’s 2000 Stock Incentive Plan by a vote of 6,253,695 shares for and 2,939,044 shares against, with 364,123 shares abstaining.

Item 6.   Exhibits

Exhibit 31.1 - Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certifications 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

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SIGNATURES

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

COMTECH TELECOMMUNICATIONS CORP.
(Registrant)

Date:   March 9, 2005	By:		/s/ Fred Kornberg
		———————————————
			Fred Kornberg Chairman of the Board Chief Executive Officer and President (Principal Executive Officer)

Date:   March 9, 2005	By:		/s/ Robert G. Rouse
		———————————————
			Robert G. Rouse Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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