Gennum Corporation Reports Second Quarter 2007 Results



    BURLINGTON, ON, June 27 /CNW/ - Gennum Corporation (TSX: GND) today
reported financial results for the second quarter of fiscal 2007.

    
    ($ millions except
     per share amounts)
                                   2007   % of Revenue   2006   % of Revenue
                                   ----   ------------   ----   ------------
    Second quarter
    Revenue                        35.7                  37.1
    Gross margin                   20.1         56.4     24.8         66.9
    Sales, marketing and
     administration expense        10.3         28.9      9.4         25.2
    R&D expense (gross)            11.2         31.4     11.5         31.1
    Asset impairment               (9.6)       (26.9)       -
    Net (loss) earnings            (7.0)       (19.6)     4.5         12.1
    Net (loss) earnings per
     share (basic)                (0.20)                 0.13
    

    "With the initial prioritization of Gennum's entire portfolio of
businesses and related technologies completed, we are focusing our energy and
resources on our world-class high-speed mixed signal product portfolio to
capture additional market share in video and data communications," said Dr.
Franz Fink, President and CEO of Gennum. "As a result, we are considering
various options for our Audio and Wireless Division and associated
Manufacturing Operations. Indeed, we are executing on our long-term strategy
to become a leading supplier of high-speed mixed signal products and we will
continue to undertake actions that will leverage Gennum's core technologies
for the future benefit of all stakeholders."

    Revenue

    Revenue in the second quarter of 2007 decreased 3.9% over the prior year.
However, excluding sales of end-of-life audio analogue products, revenue was
relatively flat. Video revenue was lower than expected in the second quarter,
but was more than offset by revenue increases in data communications.
Year-to-date revenue was down 1.5% or $1.1 million as compared to the prior
year; however, excluding audio analogue products, year-to-date revenue
increased 6.4%. Net earnings were impacted by non-cash charges related to the
write-down of headset inventory ($2.4 million before taxes) and the impairment
of manufacturing assets ($9.6 million before taxes).
    Revenue was lower in the second quarter and year-to-date compared to the
same periods in 2006 by $0.3 million as a result of foreign currency
fluctuations mainly due to the strengthening of the Canadian dollar. Foreign
exchange translation losses reduced pre-tax earnings by $1.6 million.
    Revenue generated from Gennum's video products portfolio totaled
$22.0 million in the second quarter of 2007, down 9% or $2.4 million compared
to the same quarter in the prior year. On a global basis, Gennum had a 30%
decline in revenue for standard-definition (SD) products compared to the prior
year. Global video revenue from high-definition (HD) products declined by 5%
compared to the same quarter in 2006.
    Data communications products achieved a fourth consecutive profitable
quarter as revenue rose 71% to a record-breaking $6.4 million in the second
quarter of 2007, compared to $3.7 million in 2006. Due to an increase in sales
across all of Gennum's data communications products, revenue of $11.5 million
for the first six months of 2007 increased by 69% compared to the same period
last year.
    Revenue from audio and wireless products declined by almost 20% to
$7.1 million in the second quarter of 2007 compared to the second quarter of
2006. The primary reason for the decline was the expected erosion of analogue
hearing product revenue as the end-of-life program entered its final phase in
the first quarter of 2007. Our digital signal processors, which now form the
basis for ongoing business in the audio and wireless segment, grew almost 20%
year to date over the prior year. The second quarter of 2007 saw revenue
increase by 12% for digital hearing components, modules and related systems.

    Gross Margin

    Gross margin as a percentage of revenue in the second quarter of 2007 was
56.4%, compared to 2006 second quarter gross margin of 66.9%. This decrease is
due primarily to an inventory provision for older generation headset materials
and finished goods in the Audio and Wireless Division. Excluding this
provision, gross margin for the quarter and year to date is 63.0% and 65.4%,
respectively. In addition, there were favorable margins in the prior year due
to the build out of analogue end-of-life products. The Company is focusing on
improving margins through actions to increase product yields and create a more
favorable sales mix.

    Asset Impairment and Inventory Write-down

    During the three months ended May 31, 2007, the Company took a non-cash
charge of $9.6 million ($6.3 million after taxes) related to the impairment of
the Company's manufacturing facilities in Burlington, Ontario. The impairment
charge was determined by comparing the carrying amount of the facilities to
their fair value. In addition, the Company wrote down the value of the headset
inventories of the Audio and Wireless Division by $2.4 million in the second
quarter of 2007. This provision was necessary as our efforts to sell older
generation products have not produced sufficient results. The impact of this
provision on consolidated gross margin as a percentage of revenue for the
quarter and year-to-date periods was a reduction of 6.6% and 3.4% of revenue,
respectively.

    Operating Expenses

    During the second quarter of 2007, sales, marketing and administration
expenditures increased $0.9 million to $10.3 million, compared to $9.4 million
in the second quarter of 2006. The increase is related to legal expenses and
higher salary costs offset by lower incentive compensation and consulting
costs related to Bill 198 compliance costs compared to the same quarter last
year.
    For the same reasons, sales, marketing and administration expenditures
year to date increased by $1.3 million to $19.4 million in 2007, compared to
$18.1 million in 2006. We are continuing to focus spending in areas that will
drive top-line growth.
    R&D spending in the second quarter of 2007 and year to date was slightly
lower compared to the same period in 2006. Lower incentive compensation
accruals were partially offset by higher salary costs.

    Net Earnings

    In the second quarter, net losses were $7.0 million, or $0.20 per share,
compared with net earnings of $4.5 million, or $0.12 per share in the second
quarter of 2006. The loss is mainly attributable to the asset impairment
charge of $9.6 million and the provision of $2.4 million for headset inventory
recorded in the quarter. Excluding these charges net of taxes, net earnings
would have been $0.9 million, or $0.03 per share; the lower earnings were
partially caused by lower gross margins and increased sales, marketing and
administration costs. Foreign exchange losses of $1.6 million in the current
quarter compared to a small foreign exchange gain in the same period last year
also reduced net earnings.

    Financial Condition

    The cash and short-term investment balance at May 31, 2007 was
$41.0 million, a decrease of $6.4 million from the end of the 2006 fiscal
year, due mainly to the annual payouts for 2006 performance under the
Company's incentive compensation plans, payments associated with the
restructuring activities and the impact of a strengthening Canadian dollar and
lower operating earnings.
    Cash used in operating activities was $0.6 million for the quarter,
compared to cash generated of $5.5 million in the second quarter of 2006,
primarily as a result of lower operating earnings and the impact of the
strengthening Canadian dollar.
    Management believes the current balance in cash and short-term
investments, plus future cash flow from operations, will be sufficient to
finance organic growth and related investment and financing activities in the
foreseeable future.

    Other Developments

    As disclosed in early 2007 a detailed assessment and prioritization of
Gennum's entire portfolio of businesses and related technologies was
undertaken. As a result, the Company is now executing on its strategy to offer
a more comprehensive high speed mixed signal portfolio that addresses the
video and data communication markets. With this portfolio focus, the Company
is exploring various strategic options for the assets of the Audio and
Wireless Division and Manufacturing Operations. Gennum engaged Genuity Capital
Markets to assist in its review and consideration of strategic alternatives,
and is presently in discussions with several parties regarding potential
transactions. However, there can be no assurance that any third party
transaction will be completed. Management believes that by focusing the
Company's energy and resources on a world-class high speed mixed signal
product portfolio, it will be better positioned to secure and gain global
market share.
    Gennum took important steps in the second quarter to become more globally
aligned, attract and retain top talent and put a stronger emphasis on
leadership development by appointing Bruce Hannah as its Senior Vice-President
of Human Resources. Mr. Hannah will be responsible for directing our human
resources activities by helping to evolve Gennum's culture, strengthen global
teamwork and develop leadership talent throughout the organization. He brings
over 25 years of human resource, finance and operations experience to Gennum,
with various senior level management positions held at Canadian Broadcasting
Company, Quebecor World and EDS.

    Commercial Developments

    Video
    -----
    Gennum continues to augment its HD-SDI portfolio and unveiled an
integrated serializer that targets emerging prosumer products such as digital
camcorders, mixers and recorders. The GS1582, which will be available for sale
in June 2007, features several enhancements over Gennum's previous HD/SD-SDI
serializers including the industry's first integrated audio multiplexer.
    In the second quarter, Gennum announced that JVC Corporation, one of the
world's leading suppliers of advanced video products for consumer and
professional applications, selected Gennum's award winning VXP(TM) technology
to power JVC's new line of image processor chips. These processors will
initially be deployed in JVC's next generation 20-inch and 24-inch flat-panel
monitors, which feature advanced image refinement capabilities using the VXP
technology.
    Additionally, Gennum announced that GlobalStreams, HaiVision and Image
Video have chosen Gennum's VXP image processing solutions for their
next-generation video conference and broadcast applications.

    Data Communications
    -------------------
    In March, Gennum announced availability of its new line of multi-rate
Fibre Channel storage repeaters. These new offerings represent the Company's
first 8.5 Gb/s offerings and feature its ClearEdge(TM) technology, which
enables reliable 8.5 Gb/s communication over a variety of media. The new
products are expected to provide customers with a low cost, high performance
solution that exceeds the requirements of the emerging 8.5 Gb/s Fibre Channel
standard.
    Additionally, Gennum, Fujitsu and Intel jointly demonstrated 10Gbps
performance for optical networking solutions at this year's Interop conference
in Las Vegas. The demonstration utilizes Fujitsu's 10 Gb/s serial
interconnect, Intel's SFP+ modules and Gennum's CDR chip. The close
collaboration between the companies has resulted in showcasing a working
10 Gb/s Ethernet switch solution with SFP+ and the significant signal
integrity optimization achieved with the use of CDRs. SFP+ is an emerging
optical module form factor which increases port density and reduces overall
cost to networking applications such as data center and enterprise switches.
    Working with two leaders in the industry and the resulting improved
performance for networking applications, further underscores Gennum's
technical core competencies in high speed mixed signal. This positively
positions us to supply to the growing SFP+ module market.

    Audio and Wireless
    ------------------
    In the audio headsets market, we began shipping our newest model, the
nX6000(TM), which was unveiled in January 2007. The nX6000 has received
excellent reviews from leading consumer publications for its noise
cancellation capability and ease of use.

    Patent litigation
    -----------------
    As previously disclosed, we were the subject of a patent infringement
claim in the US courts. This claim related to a limited number of non-core
Gennum products. In May 2007, the court determined that, of the two patents
involved, our products do not infringe on one, and the relevant claims of the
other are invalid. We are waiting to see if the plaintiff will appeal. We
believe there is a relatively low risk of the decision being overturned on
appeal.
    In the ordinary course of business activities, the Company may become
involved in litigation or claims with customers, suppliers, former employees
and third parties.

    OUTLOOK

    We see a slowdown in certain segments of the semiconductor industry.
According to the Semiconductor Industry Association (SIA), the outlook for the
global semiconductor market is slowing. The SIA lowered its forecast for 2007
chip sales growth from 10% to 1.8%.
    We believe the video market will be soft in the short term. However,
Gennum is seeing opportunities for its 3 Gb/s and HD-SDI products in North
America and Japan. With the requirements of the US-based Digital Transmission
Bill to be met by early 2009, the 2008 Olympics in Beijing and U.S.
presidential campaign, we expect to see continued demand for HD products.
Additionally, our key Japanese customers are well positioned to meet the needs
of offshore markets where the conversion to HD television is based on Japanese
standards. Key growth markets that have adopted or are considering the
Japanese standard include Brazil and other South American countries. Shipping
of HD products is expected to begin soon. Gennum will continue to strengthen
its HD-SDI and 3 Gb/s portfolio by introducing new innovative products for
video broadcast applications over the next few months.
    Gennum's image processing products have gained industry recognition as
the leading, high quality imaging solution. Additionally, our products have
gained traction in markets that demand superior HD image clarity. To ensure
alignment with the Company's growth and profitability targets, management is
reviewing the image processing portfolio to determine what actions can be
taken to improve return on investment and scalability.
    Gennum's healthy growth and revenue from its data communications product
line has the Company well positioned to capture additional global market
share. We expect continued strength in the 10 Gb/s market. Gennum's
collaboration with Intel and Fujitsu on SFP+ performance improvement for
networking applications further underscores the Company's technical core
competencies in high speed mixed signal. This positions us well to supply to
the emerging and growing SFP+ transceiver and XFP module markets.
    Good progress continues with the potential commercialization of our BST
technology. Gennum's fixed capacitor technology, mainly targeted for consumer
electronic devices, is in final prototyping stage with the Company's lead
customer. Gennum's variable BST capacitor technology met key milestones this
quarter. Prototypes were delivered to Gennum's lead customer, a leading mobile
device OEM, and the BST prototypes are being qualified. BST variable
capacitors are applicable for handheld devices such as cell phones and MP3
players.
    With the initial prioritization of Gennum's entire portfolio of
businesses and related technologies completed Gennum is exploring various
strategic options for its Audio and Wireless Division and Manufacturing
Operations. As part of this effort, Gennum has engaged Genuity Capital Markets
to assist in its review and consideration of strategic alternatives. We are
presently in discussions with several third parties regarding potential
transactions. However, there can be no assurance that any third party
transaction will be completed.
    We believe that by focusing our energy and resources on a world-class
high speed mixed signal product portfolio, Gennum will be better positioned to
secure and gain global market share. As a part of our fundamental business
processes, we will undertake actions that will strengthen our position. We are
confident these changes will strengthen the Company for the future benefit of
all stakeholders.

    Dividend

    Gennum's Board of Directors has declared a cash dividend of 3.5 cents per
share to be paid on July 11, 2007 to shareholders of record on July 25, 2007.
The dividend is considered an "eligible dividend" for tax purposes.

    -------------------------------------------------------------------------
    Management will hold a conference call to discuss second quarter results
    on Thursday, June 28, 2007 at 9:00 a.m. (ET). To access the call,
    participants should dial 1-800-731-5319. The conference call will also be
    Webcast live at www.gennum.com or www.newswire.ca/webcast and
    subsequently archived on the Gennum site. A rebroadcast of the call will
    be available until midnight on July 27, 2007. To access the rebroadcast,
    dial 416-640-1917 and enter the passcode 21233061 followed by the number
    sign.
    -------------------------------------------------------------------------

    About Gennum

    Gennum Corporation (TSX: GND) is a leading designer and manufacturer of
semiconductor solutions for the global video, data communications and audio
markets. A winner of a Technical Emmy(R) award for advances in high definition
(HD) broadcasting, Gennum's broad portfolio of products and technologies
include image processors, video timing and transport products, ICs for optical
transceivers, backplane interconnects and low power digital signal processing
(DSP) solutions. Gennum is headquartered in Burlington, Canada, and has global
design, research and development and sales offices in Canada, Japan and the
United Kingdom. www.gennum.com

    Emmy(R) is a registered trademark of the National Television Academy

    Disclaimer

    This document may contain forward-looking statements relating to our
goals, strategies, financial condition and results as well as the environment
in which we operate, investments, and litigation in which we are involved,
which may involve estimates, forecasts and projections. Forward-looking
statements may include words such as "plans", "intends", "anticipates",
"should", "estimates", "expects", "believes" and similar expressions. These
statements are not guarantees of future performance and involve risks and
uncertainties that are difficult to predict, and/or are beyond our control. A
number of important factors could cause actual outcomes and results to differ
materially from those expressed in these forward-looking statements. These
factors include those set forth in this report and other public filings.
Consequently, readers should not place any undue reliance on such
forward-looking statements. In addition, these forward-looking statements
relate to the date on which they are made. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.


    2007 SECOND QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS

    Caution about forward-looking statements

    This document may contain forward-looking statements relating to our
goals, strategies, financial condition and results as well as the environment
in which Gennum operates, investments, and litigation in which Gennum is
involved, which may involve estimates, forecasts and projections.
Forward-looking statements may include, but are not limited to, words such as
"plans", "become", "intends", "will", "anticipates", "should", "estimates",
"expects", "believes" and similar expressions. These statements are not
guarantees of future performance and involve risks and uncertainties that are
difficult to predict and/or are beyond our control. A number of important
factors could cause actual outcomes and results to differ materially from
those expressed in these forward-looking statements. These factors include our
ability to complete transactions involving our Audio and Wireless Division and
Manufacturing Operations, the level of market acceptance of our new products
and our ability to offset reductions in the sale of end-of-life analogue
products within our Audio and Wireless group, as well as those other factors
set forth in this report and other public filings. Consequently, readers
should not place any undue reliance on such forward-looking statements. In
addition, these forward-looking statements relate to the date on which they
are made. We disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

    The following discussion and analysis is intended to provide readers with
an assessment of our performance for the second quarter of 2007 together with
the comparable period in the prior year, as well as our financial position and
future prospects. It should be read in conjunction with the Company's
unaudited consolidated financial statements for the second quarter of fiscal
2007 and 2006, and the fiscal 2006 and 2005 audited consolidated financial
statements and accompanying notes and MD&A contained in our 2006 annual
report, which have been prepared in accordance with Canadian generally
accepted accounting principles. Our public disclosure documents, including our
historical financial statements and our annual information form, can be viewed
at www.sedar.com.
    In this discussion and analysis, "Gennum", "the Company", "we", "our" and
similar references include Gennum Corporation and its subsidiaries. All
amounts are in Canadian dollars.

    CORPORATE OVERVIEW AND BUSINESS STRATEGY

    As disclosed in early 2007, a detailed assessment and prioritization of
Gennum's entire portfolio of businesses and related technologies was
undertaken. As a result, the Company is now executing on its strategy to offer
more comprehensive high speed mixed signal products that address the video and
data communication markets. With this portfolio focus, the Company is
exploring various strategic options for the assets of the Audio and Wireless
Division and Manufacturing Operations. Gennum engaged Genuity Capital Markets
to assist in its review and consideration of strategic alternatives, and is
presently in discussions with several parties regarding potential
transactions. However, there can be no assurance that any third party
transaction will be completed. Management believes that by focusing the
Company's energy and resources on a world-class high speed mixed signal
product portfolio, it will be better positioned to secure and gain global
market share.
    On a year-to-date basis, growth of our high speed mixed signal product
lines which include video transport interfaces, data communications optical
transceivers and backplane products increased by 4% over the prior year.
Gennum's technology strength for data communication applications like data
center and enterprise switches was underscored as the Division achieved its
highest revenue levels and fourth consecutive profitable quarter. The market
for 10 Gigabits per second (Gb/s) optical transceivers continues to grow,
driving sales of 10 Gb/s CDR and 10 Gb/s TIA products. Additionally, Gennum's
video products for next-generation 3 Gb/s video broadcast equipment are
receiving positive customer response. This positions the Company to take
advantage of the global market for high speed 3 Gb/s solutions.
    Gennum took important steps in the second quarter to become more globally
aligned, attract and retain top talent and put a stronger emphasis on
leadership development by appointing Bruce Hannah as its Senior Vice-President
of Human Resources. Mr. Hannah will be responsible for directing our human
resources activities by helping to evolve Gennum's culture, strengthen global
teamwork and develop leadership talent throughout the organization. He brings
over 25 years of human resource, finance and operations experience to Gennum,
with various senior level management positions held at Canadian Broadcasting
Company, Quebecor World and EDS.

    Asset Impairment and Inventory Write-down

    During the three months ended May 31, 2007, the Company took a non-cash
charge of $9.6 million ($6.3 million after taxes) related to the impairment of
the Company's manufacturing facilities in Burlington, Ontario. The impairment
charge was determined by comparing the carrying amount of the manufacturing
facilities to their fair value. In addition, the Company wrote down the value
of the headset inventories of the Audio and Wireless Division by $2.4 million
in the second quarter of 2007. This provision was necessary as our efforts to
sell older generation products have not produced sufficient results. The
impact of this provision on consolidated gross margin as a percentage of
revenue for the quarter and year-to-date periods was a reduction of 6.6% and
3.4% of revenue, respectively.
    The asset impairment and inventory write-down affect the net book value
of the assets currently under strategic review and reflect management's
expectations of fair market value. However, any actual net realizable value
could differ from the current carrying value.

    
    RESULTS FROM OPERATIONS
    (in millions of dollars
    except earnings per share)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Revenue                35.7     37.1     (3.9)    70.6     71.6     (1.5)
    Gross margin           20.1     24.8    (19.0)    43.8     47.2     (7.1)
    Asset impairment       (9.6)       -      n/a     (9.6)       -      n/a
    (Loss) earnings from
     operations            (9.0)     6.3      n/a     (3.4)    10.9      n/a
    Net (loss) earnings    (7.0)     4.5      n/a     (2.7)     8.2      n/a
    Basic (Loss) earnings
     per share            (0.20)    0.13      n/a    (0.08)    0.23      n/a
    Cash & short tem
     investments           41.0     36.3     12.9     41.0     36.3     12.9
    -------------------------------------------------------------------------

    Revenue in the second quarter of 2007 decreased 3.9% over the prior year.
However, excluding sales of end-of-life audio analogue products, revenue was
relatively flat. Video revenue was lower than expected in the second quarter,
but was more than offset by revenue increases in data communications.
Year-to-date revenue was down 1.5% or $1.1 million as compared to the prior
year; however, excluding audio analogue products, year-to-date revenue
increased 6.4%. Net earnings were impacted by non-cash charges related to the
writedown of headset inventory ($2.4 million before taxes) and the impairment
of manufacturing facilities ($9.6 million before taxes).
    Revenue was lower in the second quarter and year-to-date compared to the
same periods in 2006 by $0.3 million as a result of foreign currency
fluctuations mainly due to the strengthening of the Canadian dollar. Foreign
exchange translation losses reduced pre-tax earnings by $1.6 million.

    Revenue
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Video                  22.0     24.4     (9.5)    44.7     46.1     (3.2)
    Audio & Wireless        7.1      8.8    (19.6)    14.0     18.2    (23.2)
    Data Communications     6.4      3.7     71.1     11.5      6.8     68.6
    Other                   0.2      0.2        -      0.4      0.5        -
    -------------------------------------------------------------------------
    Total Revenue          35.7     37.1     (3.9)    70.6     71.6     (1.5)
    -------------------------------------------------------------------------
    

    Video Products

    Revenue generated from Gennum's video products portfolio totaled
$22.0 million in the second quarter of 2007, down 9% or $2.4 million compared
to the same quarter in the prior year. On a global basis, Gennum had a 30%
decline in revenue for standard-definition (SD) products compared to the prior
year. Global video revenue from high-definition (HD) products declined by 5%
compared to the same quarter in 2006. Portions of the video market correction
can be attributed to inventory adjustments being made by leading video OEMs.
Additionally, TNS Media Intelligence reported total broadcast television
advertising revenue was down 5.3% compared to the same period in the prior
year. It is believed that fluctuations in advertising revenue can
significantly impact equipment purchases.
    Video products revenue represented 62% of the total Gennum consolidated
revenue in the second quarter of 2007 (2006 - 66%). For the first half of
2007, video products represented 63% of the total Gennum consolidated revenue
(2006 - 64%). Revenue generated from the HD-SDI market represented 66% of the
total video revenue in the second quarter of 2007 (2006 - 63%).
    In the second quarter of 2007, 67% of video revenue came from US dollar
sales (2006-67%) while 27% came from sales in Japanese yen (2006-25%). For the
first half of 2007, 68% of video revenue came from US dollar sales (2006-65%)
while 26% came from sales in Japanese yen (2006-28%).
    On a geographical basis, North American demand for HD products decreased
8% compared to the second quarter of 2006; however, revenue increased 3%
compared to the first quarter of 2007. We believe the slight increase versus
the first quarter is attributed to studios becoming HD-ready and the
preliminary builds occurring for the 2008 Olympics and United States
presidential campaign.
    Europe had the largest decline in demand for HD products. Europe's push
for HD infrastructure was mainly driven to support the 2006 World Cup thus
causing higher demand last year. European revenue for HD products declined
almost 26% in the second quarter of 2007 compared to 2006.
    The Japan market continued to level out as HD sales to Japanese customers
were only 1% lower in the quarter versus the same period in 2006. In a
comparison to first quarter 2007, HD sales increased by 6% primarily as a
result of increased unit volume. Gennum expects future HD sales in the
Japanese domestic market to be based primarily on maintenance and upgrade
requirements. As well, we expect ongoing sales to Japanese OEM customers to
strengthen as they ramp exports of video products to support HD conversion in
foreign markets.
    Gennum continues to augment its HD-SDI portfolio and unveiled an
integrated serializer that targets emerging prosumer products such as digital
camcorders, mixers and recorders. The GS1582, which will be available for sale
in June 2007, features several enhancements over Gennum's previous HD/SD-SDI
serializers including the industry's first integrated audio multiplexer.
    Image processing components increased more than 40% in the second quarter
of 2007 compared to the prior year; however, this is generated from a small
revenue base. Image processing sales were primarily from Japan, the United
Kingdom and Asia Pacific countries, but remained flat in North America,
compared to same quarter in 2006. Design wins in high-end image processing
markets secured in 2005 and 2006 are beginning to generate revenue.
    In the second quarter, Gennum announced that JVC Corporation, one of the
world's leading suppliers of advanced video products for consumer and
professional applications, selected Gennum's award winning VXP(TM) technology
to power JVC's new line of image processor chips. These processors will
initially be deployed in JVC's next generation 20-inch and 24-inch flat-panel
monitors, which feature advanced image refinement capabilities using the VXP
technology.
    Additionally, Gennum announced that GlobalStreams, HaiVision and Image
Video have chosen Gennum's VXP image processing solutions for their
next-generation video conference and broadcast applications.
    To improve return on investment and achieve more significant scale,
management is reviewing the image processing portfolio to determine what
actions can be taken to achieve these goals and meet the Company's overall
growth and profitability targets.

    Data Communications

    Data communications products achieved a fourth consecutive profitable
quarter as revenue rose 71% to a record-breaking $6.4 million in the second
quarter of 2007, compared to $3.7 million in 2006. Due to an increase in sales
across all of Gennum's data communications products, revenue of $11.5 million
for the first six months of 2007 increased by 69% compared to the same period
last year. Data communications products revenue represented 18% of the total
Gennum consolidated revenue in the second quarter of 2007 (2006 - 10%). For
the first half of 2007, data communications represented 16% (2006 - 10%) of
the total Gennum consolidated revenue.
    In the second quarter of 2007, 80% of the data communications revenue
came from US dollar sales (2006 - 67%) while 20% came from sales in Japanese
yen (2006 - 33%). For the first half of 2007, 79% of data communications
revenue came from US dollar sales (2006 - 69%) while 21% came from sales in
Japanese yen (2006 - 31%).
    The market for 10 Gb/s optical transceivers continues to grow and
Gennum's revenue increase is primarily attributable to its sales of high-speed
10 Gb/s optical transceiver ICs. In the second quarter of 2007, revenue from
our 10 Gb/s CDRs, which are sold exclusively to the 10 Gb/s XFP optical
transceiver market, increased 64% versus 2006. Revenue from our 10 Gb/s TIAs,
which are sold to all 10 Gb/s optical transceiver types (including XFP),
increased 153% versus 2006. On a year to date basis, revenue from our 10Gb/s
CDRs and 10 Gb/s TIAs increased 56% and 161%, respectively, compared to the
same period in 2006.
    Sales were down slightly in our backplane product line compared to the
same quarter in the prior year. This was due to a lower demand for Gennum's
core SerDes router as a key customer switched to a lean manufacturing model.
However, this was partially offset by the introduction in the third quarter of
2006 of a new backplane equalizer product for use in Ethernet switch
equipment.
    In March, Gennum announced availability of its new line of multi-rate
Fibre Channel storage repeaters. These new offerings represent the Company's
first 8.5 Gb/s offerings and feature its ClearEdge technology, which enables
reliable 8.5 Gb/s communication over a variety of media. The new products are
expected to provide customers with a low cost, high performance solution that
exceeds the requirements of the emerging 8.5 Gb/s Fibre Channel standard.
    Additionally, Gennum, Fujitsu and Intel jointly demonstrated 10 Gb/s
performance for optical networking solutions at this year's Interop conference
in Las Vegas. The demonstration utilizes Fujitsu's 10 Gb/s serial
interconnect, Intel's SFP+ modules and Gennum's CDR chip. The close
collaboration between the companies has resulted in showcasing a working
10 Gb/s Ethernet switch solution with SFP+ and the significant signal
integrity optimization achieved with the use of CDRs. SFP+ is an emerging
optical module form factor which increases port density and reduces overall
cost to networking applications such as data center and enterprise switches.
    Working with two leaders in the industry and the resulting improved
performance for networking applications, further underscores Gennum's
technical core competencies in high speed mixed signal. This positively
positions us to supply to the growing SFP+ module market.

    Audio and Wireless

    Revenue from audio and wireless products declined by almost 20% to
$7.1 million in the second quarter of 2007 compared to the second quarter of
2006. Revenue for the first six months of 2007 was 23% lower at $14.0 million
compared to the same period last year. The primary reason for the decline was
the expected erosion of analogue hearing product revenue as the end-of-life
program entered its final phase in the first quarter of 2007. Our digital
signal processors, which now form the basis for ongoing business in the audio
and wireless segment, grew almost 20% over the prior year. The second quarter
of 2007 saw revenue increase by 12% for digital hearing components, modules
and related systems.
    Year-to-date revenue from sales of digital components was higher compared
to the last year by almost 20% as a result of higher sales of our VOYAGEUR(TM)
and FOUNDATION(TM) products. This increase was partially offset by lower sales
of our PARAGON(TM) product, which we have been shipping since the beginning of
2002 and is in the mature phase of the product life cycle. We expect that
future digital revenue will come primarily from VOYAGEUR and VOYAGEUR-based
products. Additionally, we are continuing to work with lead customers on the
development of the ultra-low power wireless FALCON(TM) platform.
    In the audio headsets market, we began shipping our newest model, the
nX6000(TM), which was unveiled in January 2007. The nX6000 has received
excellent reviews from leading consumer publications for its noise
cancellation capability and ease of use. Additional US carrier penetration and
OEM support is required for this product to gain more market momentum.
    Audio and wireless products revenue represented 20% of total Gennum
consolidated revenue in the second quarter of 2007 (2006 - 24%). Year-to-date
2007 revenue represented 20% (2006 - 25%) of total Gennum consolidated
revenue.
    In the second quarter of 2007, 64% of Audio and Wireless revenue came
from US dollar sales (2006 - 48%) while 9% came from sales in Japanese yen
(2006 - 7%). For the first half of 2007, 61% of Audio and Wireless revenue
came from US dollar sales (2006 - 43%) while 12% came from sales in Japanese
yen (2006 - 6%).

    Other

    Other revenue consists primarily of legacy user specific integrated
circuits products outside of our core markets.

    
    Gross margin
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Gross Margin           20.1     24.8     (18.9)   43.8     47.2     (7.2)

    Percentage of
     revenue               56.4     66.9              62.1     65.9
    -------------------------------------------------------------------------

    Gross margin as a percentage of revenue in the second quarter of 2007 was
56.4%, compared to 2006 second quarter gross margin of 66.9%. This decrease is
due primarily to an inventory provision for older generation headset materials
and finished goods in the Audio and Wireless Division. Excluding this
provision, gross margin for the quarter and year to date is 63.0% and 65.4%,
respectively. In addition, there were favorable margins in the prior year due
to the build out of analogue end-of-life products. The Company is focusing on
improving margins through actions to increase product yields and create a more
favorable sales mix.

    Sales, marketing and administration expenditures
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Sales, marketing and
     administration
     expense               10.3      9.4      10.0    19.4     18.1      7.2

    Percentage of
     revenue               28.9     25.2              27.5     25.3
    -------------------------------------------------------------------------

    During the second quarter of 2007, sales, marketing and administration
expenditures increased $0.9 million to $10.3 million, compared to $9.4 million
in the second quarter of 2006. The increase is related to legal expenses and
higher salary costs offset by lower incentive compensation and consulting
costs related to Bill 198 compliance costs compared to the same quarter last
year.
    For the same reasons, sales, marketing and administration expenditures
year to date increased by $1.3 million to $19.4 million in 2007, compared to
$18.1 million in 2006. We are continuing to focus spending in areas that will
drive top-line growth.

    Research and development (R&D) expenditures
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    R&D expense (gross)    11.2     11.5      (2.7)   22.3     22.6     (1.6)

    Percentage of
     revenue               31.4     31.1              31.6     31.6
    -------------------------------------------------------------------------

    R&D spending in the second quarter of 2007 and year to date was slightly
lower compared to the same period in 2006. Lower incentive compensation
accruals were partially offset by higher salary costs.

    Asset impairment
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Asset impairmemt        9.6        -       n/a     9.6        -      n/a

    Percentage of
     revenue               26.9        -              13.6        -
    -------------------------------------------------------------------------

    During the second quarter of 2007, the Company took a non-cash asset
impairment charge of $9.6 million ($6.3 million after taxes) on its
manufacturing facilities. Production levels in the facilities, which primarily
produce legacy video products and assembles hybrids for the audio and wireless
segment, had fallen significantly thus increasing the level of
underutilization in the facility. As part of its normal accounting procedures,
the Company also assessed the carrying value of the manufacturing facilities
was less than the undiscounted estimated future cash flows from such
operations, and determined that an impairment charge was appropriate. The
impairment charge was determined by comparing the carrying amount of the
manufacturing facilities to independent quoted market prices.

    Other income (expense)
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Other income
     (expense)             (1.6)    (0.2)      n/a    (1.2)     0.3      n/a

    Percentage of
     revenue                n/a      n/a               n/a      0.4
    -------------------------------------------------------------------------

    Other expense in the second quarter was primarily related to a
$1.6 million foreign exchange loss (2006- $0.1 million foreign exchange gain).
This loss is a result of a translation loss of $1.6 million (2006 -
translation loss of $0.9 million partially offset by a $0.8 million hedging
gain).

    Income taxes
    (in millions of dollars)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Income taxes           (3.2)     1.9       n/a    (0.9)     3.6      n/a
    -------------------------------------------------------------------------

    Income tax recoveries for the six months ended May 31, 2007 represented
24.6% of losses before taxes, compared to income taxes of 30.7% of earnings
before taxes for the same period in 2006. The effective tax recovery rate in
the first half of 2007 was below the statutory tax rate of 34.1% due primarily
to permanent differences such as stock option amortization.

    Net (loss) earnings
    (in millions of dollars except earnings per share)

                         Three Months Ended May 31   Six Months Ended May 31
                           2007     2006  % change    2007     2006  % change
    -------------------------------------------------------------------------
    Net (loss) earnings    (7.0)     4.5       n/a    (2.7)     8.2      n/a

    Net (loss) earnings
     as % of revenue      (19.6)    12.1       n/a    (3.9)    11.4      n/a

    Basic earnings per
     share                (0.20)    0.13       n/a   (0.08)    0.23      n/a
    -------------------------------------------------------------------------
    

    In the second quarter, net losses were $7.0 million, or $0.20 per share,
compared with net earnings of $4.5 million, or $0.12 per share in the second
quarter of 2006. The loss is mainly attributable to the asset impairment
charge of $9.6 million and the provision of $2.4 million for headset inventory
recorded in the quarter. Excluding these charges net of taxes, net earnings
would have been $0.9 million, or $0.03 per share; the lower earnings were
partially caused by lower gross margins and increased sales, marketing and
administration costs. Foreign exchange losses of $1.6 million in the current
quarter compared to a small foreign exchange gain in the same period last year
also reduced net earnings.
    Within the business segments, the Audio and Wireless operating loss
increased to $13.2 million from $2.0 million in the second quarter of 2006.
The loss in the current quarter was mainly due to the asset impairment
attributed to the Audio and Wireless Division of $6.5 million, an inventory
provision of $2.4 million, legal expenses and lower overall gross margins. The
operating loss in this segment before the impairment charge and inventory
write-down, was approximately $4.3 million.
    The Video Division's operating earnings decreased $5.5 million from
$8.7 million to $3.2 million. This is mainly due to the asset impairment of
$3.0  million, slower than anticipated sales for SD products globally and HD
products in Europe and higher costs in sales, marketing and administration in
the quarter. The operating earnings in this segment before the impairment
charge was approximately $6.2 million.
    The Data Communications Division reported operating earnings of
$1.0 million compared to a loss of $0.5 million in the second quarter of 2006
as a result of record sales.

    
    Quarterly Results
    (in millions of dollars except earnings per share)

    -------------------------------------------------------------------------
                         Second         First        Fourth         Third
                         Quarter       Quarter       Quarter       Quarter
                       2007   2006   2007   2006   2006   2005   2006   2005
    -------------------------------------------------------------------------

    Revenue            35.7   37.1   34.9   34.5   37.0   37.4   38.7   36.0

    Asset impairment   (9.6)     -      -      -      -      -      -      -

    Restructuring
     charge               -      -      -      -   (2.0)     -      -      -

    Net (loss)
     earnings          (7.0)   4.5    4.3    3.7    2.8    5.3    6.3    4.9

    Net (loss)
     earnings per
     share
      - basic         (0.20)  0.13   0.12   0.10   0.08   0.15   0.18   0.14
      - diluted       (0.19)  0.12   0.12   0.10   0.08   0.15   0.18   0.14
    -------------------------------------------------------------------------
    

    Our revenue and net earnings performance fluctuate on a quarterly basis
due to a wide variety of factors. Sales can vary significantly each quarter,
depending on the timing of purchasing decisions by customers.
    In addition, expenditures to fabricate new computer-simulated circuit
designs into silicon form, legal expenditures on the continuing patent
litigation and foreign exchange gains or losses can also vary significantly
each quarter.

    FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RE

SOURCES Cash and short-term investments The cash and short-term investment balance at May 31, 2007 was $41.0 million, a decrease of $6.4 million from the end of the 2006 fiscal year, due mainly to the annual payouts for 2006 performance under the Company's incentive compensation plans, payments associated with the restructuring activities and the impact of a strengthening Canadian dollar and lower operating earnings. Cash used in operating activities was $0.6 million for the quarter, compared to cash generated of $5.5 million in the second quarter of 2006, primarily as a result of lower operating earnings and the impact of the strengthening Canadian dollar. Management believes the current balance in cash and short-term investments, plus future cash flow from operations, will be sufficient to finance organic growth and related investment and financing activities in the foreseeable future. Accounts receivable At May 31, 2007, the accounts receivable balance was $21.5 million, which is down $1.3 million compared to the end of the 2006 fiscal year. The decrease is mainly due to the strengthening of the Canadian dollar. There were no material write-offs during the quarter. Inventories Inventories of $28.7 million at May 31, 2007 represent a decrease of 8.8%, compared to the end of the 2006 fiscal year. The decrease of $2.8 million came primarily from an inventory provision for older generation headset materials and finished goods in the Audio and Wireless Division. Long-term investment As a result of the new accounting standards adopted in 2007, our investment in Nanoscience is recorded on the balance sheet at its market value of $2.5 million. A $0.7 million loss was recorded to the opening balance of "accumulated other comprehensive loss" (note 7 of the financial statements) to reflect the adjustment of the investment at December 1, 2006. There was a gain on the investment of $0.1 million recorded to other comprehensive income in the first half of the year to reflect an upward movement in market value. The shares of Nanoscience are traded on the AIM exchange in London, England in British pounds and are therefore subject to foreign exchange fluctuations. Accounts payable and accrued liabilities Accounts payable and accrued liabilities at May 31, 2007 were $8.2 million, which represents a decrease of 54% or $9.8 million compared to year-end. This reduction resulted primarily from the annual payments under the Company's incentive compensation plans and lower severance accruals as the majority of the severance accruals related to the restructuring action taken in 2006 were paid in the first half of 2007. Total assets Total assets as at May 31, 2007 were $153.7 million, a decrease of $16.7 million from 2006 year end, resulting primarily from the capital asset impairment of $9.6 million and the $6.4 million reduction in cash and short-term investments. Capital expenditures Capital additions were $2.2 million in the first half of 2007 compared to $2.4 million in the same period in 2006. Capital additions in 2007 consisted primarily of R&D items (68%) and manufacturing equipment (14%). R&D spending is supporting the continued investment in product development. Dividends Total dividends of $1.3 million, or $0.035 per share, were paid in the second quarter of 2007 (2006 - $1.3 million, or $0.035 per share). Derivative financial instruments Effective December 1, 2006, the Company adopted new accounting policies that affected derivative and other financial instruments. See below under Changes in Significant Accounting Policies and Note 1 to the unaudited consolidated financial statements for the second quarter for a discussion on the changes. As at May 31, 2007, we had entered into foreign exchange forward contracts to sell an aggregate amount of US $15.0 million and Japanese yen 1,258 million. These contracts mature at the latest on March 26, 2008, at exchange rates varying between Canadian $1.0712 and Canadian $1.1545 against the US dollar, and between Canadian $0.00889 and Canadian $0.00993 against the Japanese yen. Management estimates that a gain of $1.3 million would be realized if the contracts were terminated on May 31, 2007. In accordance with new accounting standards effective this year, these forward contracts are considered cash flow hedges and therefore this gain of $0.9 million, net of tax, has been included in other comprehensive income. This loss is expected to be reclassified to net income over the next twelve months as the forward contracts mature. Realized losses on foreign exchange forward and spot contracts were $0.1 million during the quarter (Q2 2006 - gains of $0.8 million). CONTRACTUAL OBLIGATIONS (in thousands of dollars) ------------------------------------------------------------------------- Payments Due by Period ---------------------- Less than 1-3 4+ Total 1 year years years Operating leases 11,309 2,783 7,095 1,431 Purchase obligations(1) 3,453 3,437 16 - License fee obligations and other 1,922 753 984 185 ------------------------------------------------------------------------- Total contractual obligations 16,684 6,973 8,095 1,616 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed or variable price provisions; and the approximate timing of the transactions. The purchase obligations relate primarily to inventory, product development, and general operating costs. RELATED PARTY TRANSACTIONS In the normal course of business, we may enter into transactions with related parties. These transactions occur under market terms consistent with the terms of transactions with unrelated arms-length third parties. The Company did not enter into any related party transactions during the quarter. Patent litigation As previously disclosed, we were the subject of a patent infringement claim in the US courts. This claim related to a limited number of non-core Gennum products. In May 2007, the court determined that, of the two patents involved, our products do not infringe on one, and the relevant claims of the other are invalid. We are waiting to see if the plaintiff will appeal. We believe there is a relatively low risk of the decision being overturned on appeal. In the ordinary course of business activities, the Company may become involved in litigation or claims with customers, suppliers, former employees and third parties. NEW ACCOUNTING POLICIES AND CRITICAL ESTIMATES A summary of significant accounting policies is presented in Note 1 to our 2006 consolidated financial statements. Certain of our accounting policies are critical to understanding the results of operations and financial condition of Gennum. These critical accounting policies require us to make certain judgements and estimates, some of which may relate to matters that are uncertain. For a description of the judgements and estimates involved in the application of critical accounting policies and assumptions made, refer to our 2006 Annual Report. The accounting policies used in the preparation of these Consolidated Financial Statements are consistent with those used in the Company's November 30, 2006 audited Consolidated Financial Statements, except as described below. Changes in Significant Accounting Policies Effective December 1, 2006, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards resulted in changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments that have been recorded in opening accumulated other comprehensive loss. The comparative Consolidated Financial Statements have not been restated, except for the presentation of translation gains or losses on self-sustaining foreign operations. For a description of the principal changes in accounting for financial instruments and hedges due to the adoption of the accounting standards and for further details on changes in significant accounting policies, see Note 1 to the unaudited Consolidated Financial Statements for the quarter ended May 31, 2007. The Company follows the guidance in the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3063, "Impairment of Long-Lived Assets". When events or circumstances warrant a review, the Company evaluates the carrying value of long-lived and intangible assets for potential impairment. The carrying value of such assets are considered impaired when the anticipated net recoverable amount of the asset, represented by the anticipated undiscounted cash flows directly attributable to the asset, is less than its carrying value. In that event, the carrying value of the asset is adjusted to fair value and an impairment loss is recorded. Changes in Critical Estimates During the first quarter, the Company re-evaluated the estimated useful lives of its buildings and determined that the estimated useful lives should be increased to thirty years from twenty years. The impact of this change was applied on a prospective basis commencing with the first quarter of 2007. The impact of this change of accounting estimate resulted in a decrease in depreciation expense of $0.3 million in the first half of fiscal 2007. As previously discussed, the Company determined that the carrying value of the manufacturing building and related production and computer equipment was less than the undiscounted future cash flows of such assets. The impact was a non-cash asset impairment charge of $9.6 million in the quarter based on independent quoted market prices. CONTROLS AND PROCEDURES There have been no changes in the Company's internal control over financial reporting during the first half of 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. Common shares outstanding At May 31, 2007, there were 35,810,286 common shares of Gennum outstanding, compared with 35,784,636 shares at November 30, 2006 At June 27, 2007, there were 35,810,286 common shares outstanding. RISKS AND UNCERTAINTIES We are subject to a number of risks and uncertainties that could significantly affect our financial condition and performance. As we grow, continue our commitment to R&D, and enter into new markets, these risks increase. At the same time, by diversifying revenue streams across additional product areas, we believe we can mitigate the risk associated with any difficulties encountered in any one product line or market. A comprehensive planning process exists to identify risks and minimize them wherever possible. With the announcement of the review of strategic alternatives involving our Audio and Wireless Division and Manufacturing Operations, Gennum is subject to the risk that it may be unable to complete a transaction with a third party. OUTLOOK We see a slowdown in certain segments of the semiconductor industry. According to the Semiconductor Industry Association (SIA), the outlook for the global semiconductor market is slowing. The SIA lowered its forecast for 2007 chip sales growth from 10% to 1.8%. We believe the video market will be soft in the short term. However, Gennum is seeing opportunities for its 3 Gb/s and HD-SDI products in North America and Japan. With the requirements of the US-based Digital Transmission Bill to be met by early 2009, the 2008 Olympics in Beijing and U.S. presidential campaign, we expect to see continued demand for HD products. Additionally, our key Japanese customers are well positioned to meet the needs of offshore markets where the conversion to HD television is based on Japanese standards. Key growth markets that have adopted or are considering the Japanese standard include Brazil and other South American countries. Shipping of HD products is expected to begin soon. Gennum will continue to strengthen its HD-SDI and 3 Gb/s portfolio by introducing new innovative products for video broadcast applications over the next few months. Gennum's image processing products have gained industry recognition as the leading, high quality imaging solution. Additionally, our products have gained traction in markets that demand superior HD image clarity. To ensure alignment with the Company's growth and profitability targets, management is reviewing the image processing portfolio to determine what actions can be taken to improve return on investment and scalability. Gennum's healthy growth and revenue from its data communications product line has the Company well positioned to capture additional global market share. We expect continued strength in the 10 Gb/s market. Gennum's collaboration with Intel and Fujitsu on SFP+ performance improvement for networking applications further underscores the Company's technical core competencies in high speed mixed signal. This positions us well to supply to the emerging and growing SFP+ transceiver and XFP module markets. Good progress continues with the potential commercialization of our BST technology. Gennum's fixed capacitor technology, mainly targeted for consumer electronic devices, is in final prototyping stage with the Company's lead customer. Gennum's variable BST capacitor technology met key milestones this quarter. Prototypes were delivered to Gennum's lead customer, a leading mobile device OEM, and the BST prototypes are being qualified. BST variable capacitors are applicable for handheld devices such as cell phones and MP3 players. With the initial prioritization of Gennum's entire portfolio of businesses and related technologies completed, Gennum is exploring various strategic options for its Audio and Wireless Division and Manufacturing Operations. As part of this effort, Gennum has engaged Genuity Capital Markets to assist in its review and consideration of strategic alternatives. We are presently in discussions with several third parties regarding potential transactions. However, there can be no assurance that any third party transaction will be completed. We believe that by focusing our energy and resources on a world-class high speed mixed signal product portfolio, Gennum will be better positioned to secure and gain global market share. As a part of our fundamental business processes, we will undertake actions that will strengthen our position. We are confident these changes will strengthen the Company for the future benefit of all stakeholders. June 27, 2007 GENNUM CORPORATION Unaudited Consolidated Financial Statements For the Six Months ended May 31, 2007 The attached consolidated financial statements have been prepared by Management of Gennum Corporation and have not been reviewed by an auditor. Gennum Corporation CONSOLIDATED BALANCE SHEETS (Canadian dollars, amounts in thousands) As at May 31, November 30, 2007 2006 (unaudited) (audited) ------------------------------------------------------------------------- ASSETS Current Cash and short-term investments 40,997 47,421 Accounts receivable 21,471 22,773 Inventories 28,708 31,490 Prepaid expenses and other assets 4,650 2,827 Income taxes receivable 888 - Loan receivable (note 2) 262 275 Future income taxes 10,821 10,892 ------------------------------------------------------------------------- Total current assets 107,797 115,678 ------------------------------------------------------------------------- Capital assets, net (note 3) 31,582 43,220 Long-term investment (note 4) 2,552 3,217 Intangible assets, net (note 5) 1,998 2,366 Long-term loan receivable (note 2) 2 147 Long-term prepaid royalty 1,222 1,222 Goodwill 2,531 2,531 Future income taxes 6,025 2,051 ------------------------------------------------------------------------- 153,709 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 8,215 18,048 Income taxes payable - 432 Future income taxes 1,151 2,594 ------------------------------------------------------------------------- Total current liabilities 9,366 21,074 ------------------------------------------------------------------------- Future income taxes 62 66 ------------------------------------------------------------------------- Shareholders' equity Capital stock (note 6) 11,300 11,001 Deferred compensation (1,524) (2,148) Retained earnings 137,823 143,068 Contributed surplus 579 94 Accumulated other comprehensive loss (note 7) (3,897) (2,723) ------------------------------------------------------------------------- Total shareholders' equity 144,281 149,292 ------------------------------------------------------------------------- 153,709 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 12) Gennum Corporation CONSOLIDATED STATEMENT OF EARNINGS (unaudited) (Canadian dollars, amounts in thousands except per share data) Three Months Ended Six Months Ended May 31 May 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue (note 9) 35,670 37,116 70,551 71,611 Cost of goods sold 15,556 12,271 26,718 24,437 ------------------------------------------------------------------------- Gross margin 20,114 24,845 43,833 47,174 ------------------------------------------------------------------------- Sales, marketing and administration expense 10,308 9,368 19,416 18,118 Research and development expense 11,214 11,529 22,262 22,634 Less government assistance (2,003) (2,383) (4,085) (4,458) ------------------------------------------------------------------------- Operating expenses before asset impairment 19,519 18,514 37,593 36,294 Asset impairment (note 3) 9,595 - 9,595 - ------------------------------------------------------------------------- (Loss) earnings from operations (9,000) 6,331 (3,355) 10,880 Investment income 429 316 904 643 Other income (expense) (note 10) (1,622) (222) (1,183) 265 ------------------------------------------------------------------------- (Loss) earnings before income taxes (10,193) 6,425 (3,634) 11,788 (Recovery) provision for income taxes (note 11) (3,204) 1,917 (895) 3,621 ------------------------------------------------------------------------- Net (loss) earnings for the period (6,989) 4,508 (2,739) 8,167 Retained earnings, beginning of period 146,065 135,348 143,068 132,765 Dividends (1,253) (1,259) (2,506) (2,335) ------------------------------------------------------------------------- Retained earnings, end of period 137,823 138,597 137,823 138,597 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Loss (earnings) per share Basic (0.20) $0.13 (0.08) $0.23 Diluted (0.19) $0.12 (0.08) $0.23 ------------------------------------------------------------------------- Dividends declared per share $0.035 $0.035 $0.065 $0.065 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended Six Months Ended May 31, May 31, May 31, May 31, 2007 2006 2007 2006 ------------------------------------------------------------------------- Capital stock Balance at beginning of period 11,205 11,061 11,001 9,392 Proceeds from shares issued on exercise of options 95 6 299 1,675 ------------------------------------------------------------------------- Balance at end of period 11,300 11,067 11,300 11,067 ------------------------------------------------------------------------- Deferred compensation Balance at beginning of period (1,755) (1,357) (2,148) (1,383) New awards (33) (181) (33) (341) Forfeitures 62 - 194 - Amortization 202 212 463 398 ------------------------------------------------------------------------- Balance at end of period (1,524) (1,326) (1,524) (1,326) ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 146,065 135,348 143,068 132,765 Net (loss) income (6,989) 4,508 (2,739) 8,167 Dividends (1,253) (1,259) (2,506) (2,335) ------------------------------------------------------------------------- Balance at end of period 137,823 138,597 137,823 138,597 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of period 252 - 94 - Stock option amortization 327 - 485 - ------------------------------------------------------------------------- Balance at end of period 579 - 579 - ------------------------------------------------------------------------- Accumulated other comprehensive (loss) income, net of income taxes Balance at beginning of period (3,694) (3,229) (2,723) (3,264) Transition adjustment on adoption of financial instruments standards - - (782) - Other comprehensive (loss) income for the period (note 7) (203) 125 (392) 160 ------------------------------------------------------------------------- Balance at end of period (3,897) (3,104) (3,897) (3,104) ------------------------------------------------------------------------- Total shareholders' equity at end of period 144,281 145,234 144,281 145,234 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended Six Months Ended May 31, May 31, May 31, May 31, 2007 2006 2007 2006 ------------------------------------------------------------------------- Net (loss) earnings for the period (6,989) 4,508 (2,739) 8,167 Other comprehensive income, net of income taxes Change in unrealized (losses) gains on translating financial statements of self-sustaining foreign operations (1,477) 125 (1,370) 160 Change in gains on derivative instruments designated as cash flow hedges(1) 1,106 - 734 - Reclassification to earnings of losses on cash flow hedges(2) 158 - 182 - Change in unrealized gains on available-for-sale financial assets(3) 10 - 62 - ------------------------------------------------------------------------- Comprehensive income (loss) for the period (7,192) 4,633 (3,131) 8,327 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) - Net of income taxes of $372 year to date (2) - Net of income taxes of $94 year to date (3) - There are no income tax implications as the Company has capital loss carryforwards to offset potential capital gains Gennum Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended Six Months Ended May 31 May 31 2007 2006 2007 2006 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net (loss) earnings for the period (6,989) 4,508 (2,739) 8,167 Items not affecting cash Asset impairment 9,595 - 9,595 - Depreciation and amortization 2,301 2,525 4,617 5,218 Inventory provisions 2,177 309 2,084 473 Deferred compensation and stock option amortization 528 212 947 398 Interest and currency impact on loan receivable 21 10 4 10 Gain on financial instrument valuation (98) - (122) - Future income taxes (5,267) (936) (5,815) (2,491) ------------------------------------------------------------------------- 2,268 6,628 8,571 11,775 Net change in non-cash working capital balances related to operations (2,833) (1,176) (10,210) (10,398) ------------------------------------------------------------------------- Cash (used) provided by operating activities (565) 5,452 (1,639) 1,377 ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of capital assets (1,460) (943) (2,168) (2,393) Payment of license fees - (153) (93) (266) Loan receivable - - - (632) Repayment of loan receivable 77 83 154 83 ------------------------------------------------------------------------- Cash used in investing activities (1,383) (1,013) (2,107) (3,208) ------------------------------------------------------------------------- FINANCING ACTIVITIES Stock options exercised 95 205 299 1,675 Deferred compensation forfeited (awarded) 30 (181) 162 (341) Dividends paid (1,253) (1,259) (2,506) (2,335) ------------------------------------------------------------------------- Cash used in financing activities (1,128) (1,235) (2,045) (1,001) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and short-term investments (660) 17 (633) 36 ------------------------------------------------------------------------- Net increase (decrease) in cash and short-term investments during the period (3,736) 3,221 (6,424) (2,796) Cash and short-term investments, beginning of the period 44,733 33,095 47,421 39,112 ------------------------------------------------------------------------- Cash and short-term investments, end of the period 40,997 36,316 40,997 36,316 ------------------------------------------------------------------------- ------------------------------------------------------------------------- GENNUM CORPORATION Notes To Consolidated Financial Statements (Canadian dollars, amounts in thousands except share and per share data) 1. ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian Generally Accepted Accounting Principles (GAAP) on a basis consistent with those followed in the most recent audited financial statements, except as noted below. These unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report for the year ended November 30, 2006. Changes in accounting policies Effective December 1, 2006, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards resulted in changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments that have been recorded in opening accumulated other comprehensive loss. The comparative Consolidated Financial Statements have not been restated, except for the presentation of translation gains or losses on self sustaining foreign operations. a) Financial Assets and Financial Liabilities Prior to the adoption of the new standards, the Company classified all of its financial assets as short-term investments, investment securities or loans and receivables. Short-term investments were accounted for at fair value. Long-term investments were accounted for at cost, net of any adjustment for other-than-temporary impairment. Loans and receivables were accounted for at amortized cost using the effective interest rate method. All of the Company's financial liabilities were accounted for on an accrual basis. Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Transaction costs are recognized immediately in income or are capitalized, depending upon the nature of the transaction and the associated product. Trading Financial assets and financial liabilities that are purchased and incurred with the intention of generating profits in the near term are classified as trading. These instruments are accounted for at fair value with the change in the fair value recognized in investment income. Available-for-sale Financial assets classified as available-for-sale are carried at fair value with the changes in fair value recorded in other comprehensive income. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect other-than-temporary impairment. Previously, such write-downs were to net realizable value. Gains and losses realized on disposal of available-for-sale securities, which are calculated on an average cost basis, are recognized in other income. The long-term investment on the balance sheet has been designated as available-for-sale, which resulted in an after-tax loss of $727 recorded as an adjustment to opening accumulated other comprehensive loss as at December 1, 2006. Held-to-maturity Securities that have a fixed maturity date, where the Company intends and has the ability to hold to maturity, are classified as held-to- maturity and accounted for at amortized cost using the effective interest rate method. Loans Loans are accounted for at amortized cost using the effective interest rate method. This classification is consistent with the classification under the prior accounting standards. b) Derivatives and Hedge Accounting Embedded derivatives Derivatives may be embedded in other financial instruments (the "host instruments"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standard, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivatives are measured at fair value with subsequent changes recognized in trading income. The impact of the change in accounting policy related to embedded derivatives was not material. Hedge accounting At the inception of a hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The Company also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the cash flows of the hedged items. Under the previous standards, derivatives that met the requirements for hedge accounting were generally accounted for on an accrual basis. Under the new standards, all derivatives are recorded at fair value and are recorded in prepaid expenses and other assets or accounts payable and accrued liabilities. The Company's hedges are classified as hedges of the variability in highly probable future cash flows attributable to a forecasted transaction (cash flow hedges). The Company is exposed to variability in future revenue cash flows, as much of the Company's revenues are denominated in US dollars or Japanese yen. The amount and timing of future cash flows are projected for the next four quarters. The actual foreign currency revenue over time forms the basis for identifying the effective portion of gains and losses on the derivatives designated as cash flow hedges on forecasted transactions. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Any gains or losses in fair value relating to the ineffective portion are recognized immediately in the statement of earnings in other income (expense). Amounts accumulated in other comprehensive income are reclassified to the statement of earnings in the period in which the hedged item affects income. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income until the forecasted transaction is eventually recognized in the statement of earnings. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the statement of earnings. Upon adoption of the new standard, the Company recorded a net increase in accounts payable and other liabilities of $55 designated as cash flow hedges and an increase of $55 after-tax in accumulated other comprehensive income. c) Comprehensive Income Comprehensive income is composed of the Company's net earnings and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale financial assets, foreign currency translation gains and losses on the net investment in self-sustaining operations and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. The components of comprehensive income are disclosed in the Consolidated Statement of Comprehensive Income. d) Capital Assets Capital assets are stated at cost less accumulated depreciation, net of related government assistance and asset impairment. No depreciation is provided until the assets are ready for use. Buildings are depreciated using the straight-line method over an estimated useful life of thirty years. Equipment and furniture are depreciated using the straight-line method over estimated useful lives ranging from five to seven years. Computer software and hardware are depreciated using the straight-line method over the estimated useful life of three years. During fiscal 2007, the Company re-evaluated the estimated useful lives of its buildings and determined that the estimated useful lives should be increased to thirty years from twenty years. The impact of this change was applied on a prospective basis commencing with the first quarter of 2007. The impact of this change of accounting estimate resulted in a decrease in depreciation expense of $266 in the first half of fiscal 2007. e) Asset Impairment The Company follows the guidance in the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3063, "Impairment of Long-Lived Assets". When events or circumstances warrant a review, the Company evaluates the carrying value of long-lived and intangible assets for potential impairment. The carrying value of such assets are considered impaired when the anticipated net recoverable amount of the asset is less than its carrying value. In that event, the carrying value of the asset is adjusted to fair value and an impairment loss is recorded. 2. LOAN RECEIVABLE The Company has a loan receivable due in weekly installments of US $5, accruing interest at 7% and maturing in June 2008. Due to prepayments, as at May 31, 2007, the loan balance was $264, of which $262 was current. 3. CAPITAL ASSETS, NET May 31, November 30, 2007 2006 ------------------------------------------------------------------------- Land 2,823 2,823 Buildings 12,821 21,969 Equipment and furniture 14,179 16,058 Computer software and hardware 1,759 2,370 ------------------------------------------------------------------------- 31,582 43,220 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the second quarter of 2007, the Company determined that the carrying value of the manufacturing facilities were impaired due to the under-utilization of such facilities. The carrying values of the long- lived depreciable assets were written down to its fair value. Fair value was determined based on independent quoted fair market value. As a result, the Company recorded an impairment charge of $9,595 of which $8,612 was allocated to the manufacturing building and $983 to production and computer equipment. The net book value of the manufacturing facilities after the impact of the impairment charge is approximately $6,246. These long-lived assets are reported in the Audio & Wireless, Video and Datacom segments as the assets support all of the segments. 4. Long-Term Investment In November 2005, the Company received a 6% interest in Nanoscience Inc. (11.1 million shares) as consideration for the sale of its investment in Toumaz Technology Limited to Nanoscience. The shares of Nanoscience are traded on the AIM exchange in London, England and have a market value of $2,552 as at May 31, 2007. Under the new standards, this investment has been classified as available-for-sale and is therefore recorded on the balance sheet at its fair value. Fair value is based on the trading price of the shares and the impact of currency fluctuations. An after-tax loss of $727 was recorded as at December 1, 2006 as an opening balance adjustment to Other Comprehensive Income, with the unrealized gain of $10 recorded to other comprehensive income in the second quarter and the unrealized gain of $62 in the first half of 2007. 5. INTANGIBLE ASSETS May 31, November 30, 2007 2006 ------------------------------------------------------------------------- Licence fees 4,067 3,975 Technology intangibles 2,221 2,221 ------------------------------------------------------------------------- 6,288 6,196 Less accumulated amortization (4,290) (3,830) ------------------------------------------------------------------------- 1,998 2,366 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Licence fees are amortized using the straight-line method over the estimated useful lives ranging from three to five years. Technology intangibles represent those intangible assets resulting from the SiGe Semiconductor acquisition in May 2004. Technology intangibles are amortized using the straight-line method over the estimated useful life of seven years. Intangible assets are reviewed quarterly for impairment. There was no impairment of intangible assets in the second quarter of 2007 (Q2 2006 - $21). In the first half of 2007 no intangible assets have been written off and impairments of $79 were written off to date in 2006. 6. CAPITAL STOCK The issued common shares of the Company as at May 31, 2007 consist of 35,810,286 common shares (November 30, 2006 - 35,784,636) at a stated value of $11,300 (November 30, 2006 - $11,001). An unlimited number of preferred shares have also been authorized, none of which have been issued. The number of common stock options outstanding as at May 31, 2007 is 1,969,140, of which 539,938 are exercisable. In the second quarter of 2007, 260,000 options were granted (year to date - 720,000), 8,000 were exercised (year to date - 25,650) and 117,875 were forfeited or relinquished (year to date - 154,175). Stock Option Plan The Company has an incentive stock option plan, which provides for the granting of options for the benefit of employees and officers. The total number of Company shares that may be issued under this plan is 2,700,000 of which 1,302,898 remain available for new grants. An additional 930,000 options were issued outside the plan to new officers upon hiring at exercise prices ranging from $9.75 - $13.27. Options issued outside the plan are governed by the same conditions as applicable to the employee stock option plan. A summary of the plan and changes to date during 2007 and for the full year of 2006 are as follows: YTD 2007 2006 ------------------------------------------------------------------------- Weighted Weighted average average Number exercise Number exercise of shares price of shares Price ------------------------------------------------------------------------- Outstanding, beginning of fiscal year 1,428,965 11.53 812,713 12.44 Granted 720,000 12.89 774,527 10.79 Forfeited (154,175) 12.44 (23,625) 13.23 Exercised (25,650) 11.62 (134,650) 12.44 ------------------------------------------------------------------------- Outstanding, end of second quarter 1,969,140 11.94 1,428,965 11.53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options exercisable at May 31, 2007 539,938 12.48 651,938 12.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes information about options outstanding at May 31, 2007: Options outstanding Options Exercisable ------------------------------------------------------------------------- Weighted average Weighted Weighted Range of remaining average average exercise Number contractual exercise Number exercise prices outstanding life price exercisable price ------------------------------------------------------------------------- $9.75 - $12.00 862,438 4.8 years 10.50 307,438 11.63 ------------------------------------------------------------------------- $12.01 - $14.25 1,070,702 5.6 years 12.99 194,000 13.15 ------------------------------------------------------------------------- $14.26 - $16.50 36,000 1.1 years 15.54 36,000 15.54 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated weighted average fair value of stock options granted during the first half of 2007 was $4.14 per share using the Black-Scholes option-pricing model with the following weighted average assumptions: ----------------------------------------------- Risk-free interest rate 4.11% Expected dividend yield 1.09% Expected volatility 30.6% Expected time until exercise 5.5 years ----------------------------------------------- The Company utilizes the fair-value based method of accounting for all its stock-based compensation, which has been applied on a prospective basis. Had compensation been determined based on the fair value at the grant date for all awards granted since the inception of the incentive stock option plan, the Company's net earnings for the quarter would not have been affected, however earnings for prior periods would have been reduced by $2,523. Earnings per Share The Company uses the treasury stock method of calculating the dilutive effect of options on earnings per share. The following is a reconciliation of the numerator and denominator of earnings per share computations: Three Months Ended Six Months Ended May 31 May 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Net earnings for the year (6,989) 4,508 (2,739) 8,167 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average shares outstanding 35,808 35,991 35,799 35,951 Effect of dilutive stock options 57 145 57 145 ------------------------------------------------------------------------- Diluted weighted average shares outstanding 35,865 36,136 35,856 36,096 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share - basic (0.20) 0.13 (0.08) 0.23 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share - diluted (0.19) 0.12 (0.08) 0.23 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options to purchase 1,134,702 common shares were not included in the computation of diluted earnings per share for the six months ended May 31, 2007 because the option exercise prices and unamortized compensation costs were greater than the average market price of the common shares. 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Quarter Ended May 31, 2007 ------------------------------------------------------------------------- Unrealized loss on translating Unrealized financial gain Gain (loss) on statements (loss) on derivative of self- available instruments sustaining for sale designated as cash foreign financial flow hedges operations assets Total ------------------------------------------------------------------------- Balance, as at February 28, 2007 (403) (2,616) (675) (3,694) Changes incurred during the quarter 1,264 (1,477) 10 (203) ------------------------------------------------------------------------- Balance, as at May 31, 2007 861 (4,093) (665) (3,897) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six Months Ended May 31, 2007 ------------------------------------------------------------------------- Unrealized loss on translating Unrealized financial gain Gain (loss) on statements (loss) on derivative of self- available instruments sustaining for sale designated as cash foreign financial flow hedges operations assets Total ------------------------------------------------------------------------- Balance, as at December 1, 2006 - (2,723) - (2,723) Adjustment to opening balance (55) - (727) (782) Changes incurred during the first half of the year 916 (1,370) 62 (392) ------------------------------------------------------------------------- Balance, as at May 31, 2007 861 (4,093) (665) (3,897) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. FOREIGN EXCHANGE RISK Transactions and balances denominated in currencies other than Canadian dollars are translated on the following basis. Current assets and current liabilities are translated at the quarter-end rate of exchange. Exchange gains and losses on these balances are recognized in earnings in the quarter. Revenue and expenses are translated at the average of the monthly rates of exchange during the quarter. Fixed assets and depreciation are translated at rates prevailing when the related assets are acquired. The Company's operations outside of Canada are considered self-sustaining and accordingly, the assets and liabilities are translated to Canadian dollars using the quarter-end exchange rates and revenue and expenses are translated at the average of the monthly rates during the quarter. Exchange gains or losses on assets and liabilities are deferred and included in other comprehensive income. In order to manage the risk associated with fluctuations in foreign exchange rates, the Company has entered into foreign exchange forward contracts to sell an aggregate amount of US $15,000 and yen 1,258,000 as at May 31, 2007. These contracts mature at the latest on March 26, 2008 at exchange rates varying between Canadian $1.0712 and Canadian $1.1545 against the US dollar, and between Canadian $0.00889 and Canadian $0.00993 against the Japanese yen. Management estimates that a gain of $1,300 would be realized if the contracts were terminated on May 31, 2007. In accordance with the new standards, these forward contracts are designated as cash flow hedges and therefore this gain has been included in other comprehensive income, net of a deferred tax asset of $439. This gain is expected to be reclassified to net income over the next twelve months as the forward contracts mature. During the three months ended May 31, 2007, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized losses on foreign exchange forward and spot contracts were $127 during the quarter (2006 - gains of $777) and losses of $331 for the year to date (2006 - gain of $2,001). In addition, there were translation losses of $1,565 during the quarter (2006 - losses of $911) and $883 for the year to date (2006- losses of $1,526). 9. SEGMENTED INFORMATION The Company has three reportable segments: Video Products (Video): Develops and supplies high-performance image processing, serial digital transmission and timing generation components for display and professional video/film applications. Audio & Wireless Products (Audio): Develops and supplies a wide range of components, systems and sub-systems for use by manufacturers of analogue and digital signal processing products in the hearing instrument and other specialized markets. Wireless devices include low power links for hearing aids and wireless headset products. Data Communication Products (Datacom): Develops and supplies high- performance physical layer integrated circuits for high-speed backplane and high-speed optical transceiver applications. Each of the segments represents a strategic business unit that offers products to distinct markets. The total of segment operating earnings and Other reconciles to earnings before income taxes disclosed in the Consolidated Statement of Earnings. Corporate allocations consist of general and administrative costs which are charges for corporate services and centralized operational activities allocated to the operating segments based upon estimates of usage. The Company's Other segment revenue consists primarily of user specific integrated circuit products, which are not included within the operating segment revenues. The Company has included investment income and foreign exchange gains or losses in the determination of Other segment profit. The total assets in Other include: cash and short-term investments, future income taxes, income tax receivable or payable and capital assets not allocated to the operating segments. The significant accounting policies of the reportable segments are the same as those referred to in note 1. Quarter Ended May 31, 2007 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 22,044 7,067 6,402 157 35,670 Segment earnings (losses) 3,169 (13,249) 960 (1,073) (10,193) Depreciation and amortization 988 880 433 - 2,301 Asset Impairment (2,987) (6,531) (77) - (9,595) Corporate allocations 2,508 1,524 697 - 4,729 Capital asset additions 452 66 942 - 1,460 ------------------------------------------------------------------------- Quarter Ended May 31, 2006 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 24,352 8,784 3,741 239 37,116 Segment earnings (losses) 8,709 (1,978) (521) 215 6,425 Depreciation and amortization 1,204 800 521 - 2,525 Corporate allocations 2,125 1,584 451 - 4,160 Capital asset additions 578 165 200 - 943 ------------------------------------------------------------------------- Six Months Ended May 31, 2007 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 44,660 14,008 11,534 349 70,551 Segment earnings (losses) 11,103 (15,966) 1,444 (215) (3,634) Depreciation and amortization 2,093 1,725 799 - 4,617 Asset impairment (2,987) (6,531) (77) - (9,595) Corporate allocations 4,607 2,823 1,217 - 8,647 Capital asset additions 750 244 1,174 - 2,168 Total assets 45,041 35,451 12,889 60,328 153,709 ------------------------------------------------------------------------- Six Months Ended May 31, 2006 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 46,118 18,243 6,842 408 71,611 Segment earnings (losses) 16,245 (4,149) (1,421) 1,113 11,788 Depreciation and amortization 2,588 1,531 1,099 - 5,218 Corporate allocations 4,260 3,117 891 - 8,268 Capital asset additions 1,479 346 568 - 2,393 Total assets 46,856 51,493 12,648 47,857 158,854 ------------------------------------------------------------------------- Revenue by principal markets is as follows: Three Months Ended Six Months Ended 2007 2006 2007 2006 ------------------------------------------------------------------------- United States 12,591 12,198 25,384 25,510 Europe 5,130 7,814 10,436 14,296 Pacific Rim 12,399 10,309 23,632 20,528 Canada 5,550 6,795 11,099 11,277 ------------------------------------------------------------------------- 35,670 37,116 70,551 71,611 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue is attributable to countries based upon the location of customers. Assets per country are as follows: May 31, November 30, 2007 2006 ------------------------------------------------------------------------- Canada 138,154 154,138 UK 5,248 5,834 Japan 10,307 10,460 ------------------------------------------------------------------------- 153,709 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. OTHER INCOME (EXPENSE) Three Months Ended Six Months Ended 2007 2006 2007 2006 ------------------------------------------------------------------------- Realized gains (losses) on foreign exchange contracts (note 8) (127) 777 (331) 2,001 Unrealized foreign exchange gains on other contracts 98 - 122 - Foreign exchange (losses) on translation (note 8) (1,565) (911) (883) (1,526) ------------------------------------------------------------------------- Gain (loss) on foreign exchange (1,594) (134) (1,092) 475 Other expense (28) (88) (91) (210) ------------------------------------------------------------------------- (1,622) (222) (1,183) 265 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 11. INCOME TAXES The following is a reconciliation of the expected income tax expense obtained by applying the combined Canadian corporate tax rates to earnings before income taxes: Three Months Ended Six Months Ended 2007 2006 2007 2006 ------------------------------------------------------------------------- Expected income tax (recovery) using statutory tax rates (3,478) 2,192 (1,240) 4,022 Adjustment to future income taxes - Provincial benefit on ITCs - - - (156) Permanent differences 128 - 162 - Adjustment to final 2005 tax liability - (283) - (283) Different income tax rates on earnings of foreign subsidiaries 45 (34) 70 (41) Changes in tax rates and other 101 42 113 79 ------------------------------------------------------------------------- (3,204) 1,917 (895) 3,621 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. COMMITMENTS AND CONTINGENCIES The Company is committed to future minimum lease payments under operating leases for software design tools and buildings as at May 31, 2007 as follows: ------------------------------------------------------------------------- Design Tools Buildings Total ------------------------------------------------------------------------- 2007 1,030 363 1,393 2008 2,789 529 3,318 2009 3,270 444 3,714 2010 2,648 235 2,883 ------------------------------------------------------------------------- 9,737 1,571 11,308 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has committed to approximately $3.5 million in purchase obligations as at May 31, 2007. The purchase obligations relate primarily to inventory, product development, general operating costs and authorized capital projects. The Company is also committed to license fee payments of $1.0 million over the next 3 years and other payments of $0.2 million within the next 5 year. In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers, former employees and third parties. Management believes that adequate provisions have been recorded in the accounts where required. Although it may not be possible to accurately estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company. 13. COMPARATIVE AMOUNTS Certain of the comparative amounts have been reclassified to conform to the presentation adopted in the current year.

For further information:

For further information: Gennum Media Contact, Robin Vaitonis, Director
of Corporate Communications, Gennum Corporation, Tel: (905) 632-2999 ext.
2110, E-mail: vaitonis@gennum.com; Gennum Investor Relations Contact, Gordon
Currie, Senior Vice-President, Finance & Administration and Chief Financial
Officer, Gennum Corporation, Tel: (905) 632-2999 ext. 3060, E-mail:
gcurrie@gennum.com

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