Gennum Corporation Reports Third Quarter 2007 Results



    BURLINGTON, ON, Sept. 26 /CNW/ - Gennum Corporation (TSX: GND) today
reported financial results for the third quarter of fiscal 2007.

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

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Revenue           28.6      28.4       0.5      85.5      82.0       4.2
    Gross margin      20.6      21.5      (4.0)     64.0      62.4       2.6
    Asset impairment     -         -         -       9.6         -       n/a
    Earnings from
     continuing
     operations
     before income
     taxes             6.2       6.7      (7.1)      7.7      17.7     (56.6)
    As a % of
     revenue          21.7      23.5                 9.0      21.5

    Net earnings
     before
     discontinued
     operations        3.7       4.3     (14.0)      4.3      11.9     (63.5)
    Discontinued
     operations       (5.3)      2.0       n/a      (8.7)      2.6       n/a
    Net (loss)
     earnings         (1.6)      6.3       n/a      (4.3)     14.5       n/a

    Continuing
     operations EPS   0.10      0.12      16.7      0.12      0.33      63.6
    Net (loss)
     earnings per
     share           (0.04)     0.18       n/a     (0.12)     0.40       n/a

    Cash & short
     term
     investments      45.0      40.0      12.3      45.0      40.0      12.3
    -------------------------------------------------------------------------
    

    "Gennum met a series of important milestones this quarter in our effort
to focus R&D and resources on building a world-class optical, analogue and
mixed signal portfolio and expanding our global presence," said Dr. Franz
Fink, President and CEO of Gennum Corporation. "We successfully closed the
sale of our Consumer Headset business, reached a definitive agreement for the
purchase of our Hearing Instrument and Manufacturing Operations and introduced
a series of new and compelling high-definition consumer connectivity, 3Gb/s
and optical products to capture additional opportunities and further secure
our market leadership. Moreover, we are making good progress in delivering
upon our commitment to strengthen the company and maximize value for the
future benefit of all stakeholders."

    Revenue

    Revenue from continuing operations in the third quarter of 2007 showed a
slight increase compared to the prior year. Year-to-date revenue was up 4.2%
or $3.5 million as compared to the prior year. Revenue excludes the
discontinued operations of the Audio and Wireless Division's Hearing
Instrument and Consumer Headset Operations for both periods. The stronger
Canadian dollar impacted revenue negatively by $1.8 million on a
quarter-over-quarter basis and by $2.1 million year over year.
    Revenue generated from Gennum's video products portfolio totalled
$22.2 million in the third quarter of 2007, remaining relatively flat compared
to the same quarter in the prior year. The strengthening of the Canadian
dollar reduced revenue in the period by $1.4 million compared to the prior
year. Global video revenue from high-definition (HD) products increased by 14%
compared to the same quarter in 2006. Sales for standard definition (SD)
products continued to decline as studios focus on upgrading their equipment to
support HD and multi-standard capabilities. On a global basis, SD products had
a 28% reduction in revenue compared to the prior year.
    The Data Communications Division achieved its fifth consecutive
profitable quarter as revenue rose 9% to $6.0 million in the third quarter of
2007, compared to $5.5 million in 2006. The stronger Canadian dollar reduced
revenue by $0.4 million compared to the prior year. Due to an increase in
sales of transceiver products, the Data Communications Division reported
revenue of $17.5 million for the first nine months of 2007, which is an
increase of 42% compared to the same period last year.
    Revenue from continuing operations in audio and wireless products was
$0.4 million in the third quarter of 2007 compared to $0.6 million in the same
period last year. This revenue is primarily related to design fees for
developing the manufacture of tunable capacitors.

    Gross Margin

    Gross margin as a percentage of revenue in the third quarter of 2007 was
72.1%, compared to 2006 third quarter gross margin of 75.5%. Gennum made good
productivity and cost improvements; however, they were offset by selling price
erosion and the impact of the strengthening Canadian dollar. Gross margin for
the year to date was 74.9% compared to 76.1% for the prior year.

    Operating Expenses

    On a year-to-date basis, sales, marketing and administration expenses
increased by $1.3 million to $22.7 million, compared to $21.4 million in 2006.
However, during the third quarter of 2007, sales, marketing and administration
expenditures of $7.1 million were slightly lower than the same period last
year. Higher salary costs were partially offset by lower incentive
compensation costs. We are continuing to focus spending in areas that will
drive top-line growth.
    Gross R&D spending in the third quarter of 2007 (9.5 million) and year to
date ($29.7 million) was lower compared to the same periods in 2006
($10.5 million and $31.4 million respectively). Lower incentive compensation
accruals were partially offset by higher salary costs. FALCON(TM) costs were
lower in the current year due to the reassignment of some personnel to the
Hearing Instrument Operations, which has been classified as discontinued
operations. The reduction in spending on FALCON was partially offset by higher
spending on the development of Barium Strontium Titanate technology.

    Continuing Operations, net of tax

    In the third quarter of 2007, net earnings from continuing operations
were $3.7 million, or $0.10 per share, compared with net earnings from
continuing operations of $4.3 million, or $0.12 per share in the third quarter
of 2006. The lower earnings were mainly attributable to lower gross margins
and lower foreign exchange gains in the quarter compared to the prior year's
third quarter.
    Within the business segments, the Video Division's operating earnings
decreased $0.4 million from $6.9 million to $6.5 million. This is mainly due
to price erosion and slower than anticipated sales in the third quarter for SD
products globally and HD products in Europe.
    The Data Communications Division operating earnings for the third quarter
of 2007 matched the performance of the same quarter last year at $0.8 million.
    The remaining operations in the Audio and Wireless Division which
includes the FALCON technology portfolio incurred losses of $1.7 million
compared to $2.1 million in the third quarter of 2006 as some resources were
redirected to other projects in the discontinued Hearing Instrument
Operations.
    Pre-tax year-to-date results from continuing operations include the
manufacturing impairment of $9.6 million and operating losses from FALCON of
$2.8 million, totaling $12.4 million.

    Net Loss - Discontinued Operations

    In the third quarter, net losses were $5.3 million, or $0.14 per share,
compared with net earnings of $2.1 million, or $0.06 per share in the third
quarter of 2006.
    Discontinued operations are presented on an after tax basis and include
the results from the Consumer Headset product line and the Hearing Instrument
Operations. The Consumer Headset product line includes a $0.3 million before
tax loss on the sale, which closed in August. The Hearing Instrument
Operations include an impairment of $7.1 million before tax, related mainly to
inventory, accounts receivable and legal and advisory fee accruals regarding
the sale of the operations, which is expected to close in the fourth quarter.
    The profit for discontinued operations in 2006 was primarily due to
one-time revenue from the end-of-life program for analogue hearing products.

    Financial Condition

    The cash and short-term investment balance at August 31, 2007 was
$45.0 million, a decrease of $2.5 million from the end of the 2006 fiscal
year. This was primarily due 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.
    Cash generated in continuing operating activities was $2.4 million for
the quarter, compared to cash generated of $10.7 million in the third quarter
of 2006. This reduction was primarily 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 the second quarter of 2007, Gennum was reviewing its
image processing portfolio and assessing possible actions to accelerate the
return on investment and achieve more significant scale. As a result of this
analysis, Gennum announced in August that it is working closely with Genuity
Capital Markets to explore strategic options for its VXP(TM) Image Processing
group, which includes advanced video processing algorithm intellectual
property (IP) and integrated semiconductor products for the broadcast,
professional-AV and consumer video processing markets. Gennum is presently in
discussions with several parties regarding a potential transaction or
transactions. However, there can be no assurance that any third party
transaction will be completed. Management believes these strategic changes are
necessary in order to focus on capturing new opportunities in markets where
optical, analogue and mixed signal solutions are in high demand.
    In the third quarter of 2007, Gennum broadened its sales and support
efforts throughout Europe and Israel and selected BFi OPTiLAS, a leading
systems solutions distributor based in France, to represent its broad data
communications product portfolio. Additionally, Gennum signed a global
distribution agreement with Nu Horizons Electronics Corp., a leading global
distributor of advanced technology semiconductor, display, illumination, power
and system solutions. Nu Horizons will sell Gennum's industry-leading line of
optical, analogue and mixed-signal products. Nu Horizons has a strong global
presence, particularly in the two key regions of Europe and Asia.
    To complement the new distribution agreements and meet its global sales
expansion initiative, Gennum established new offices in Korea and Taiwan,
added new sales leadership and is opening an office in California's Silicon
Valley in order to better serve its global customers. This expansion allows
Gennum to capitalize on the rising demand for optical, analogue and
mixed-signal technologies and products in Asia and North America.
    In August, the company also announced that it realigned its leadership
and product divisions to place stronger emphasis and focus on optical,
analogue and mixed signal market opportunities. Specifically, Gennum has
created an Analogue and Mixed-Signal Division, which will be managed by Dr.
Martin Rofheart as Senior Vice President and General Manager. Gennum's optical
products for both video and data communications will now be incorporated into
a single Optical Products Division, which will be run by Gary Beauchamp,
Senior Vice President and General Manager. The VXP Group will be led by David
Lynch as its Senior Vice President and General Manager. Finally, Alan Ferguson
assumes the position of Vice President of Business Development, as the company
continues to explore new market opportunities for its broad portfolio of
products and technologies.

    Commercial Developments

    Video
    -----
    In a step to further broaden its 3 Gigabits per second (Gb/s) portfolio
offering, Gennum introduced a reference design and development board to
deliver 3Gb/s transmission using existing dual-link equipment. Gennum's new
reference design enables migration to 3Gb/s for many applications, including
video cameras, camcorders, DVRs/VTRs and 3Gb/s test signal generation.
    Gennum unveiled its new multi-rate equalizer which achieves 120 meters
for 3Gb/s transmission. Equalizers are used to equalize and restore signals
over co-axial cable for applications such as digital video routers, video
production switchers, distribution amplifiers, cameras, monitors, VTRs and
professional A/V systems. The new equalizer enables broadcast equipment
manufacturers to leverage the existing cabling they have by providing a
solution that delivers the 3Gb/s and HD performance they need at longer
distances.
    Additionally, Gennum announced availability of its 3Gb/s optical modules.
An optical solution for video broadcast equipment customers allowing them the
ability to move 1080p50/60 video, HD 4:4:4 video and HD 12 bit video formats
over a single serial link vs. dual link. In September, Utah Scientific
introduced new optical routers leveraging Gennum technology. Also, Network
Electronics and Gennum hosted a live demo at this year's International
Broadcasting Convention to showcase the capability of the new optical modules.
    Leveraging its expertise in HD video transport, Gennum unveiled a new
HDMI/DVI high-performance solution which enables disparate products to connect
and stream multimedia at the full HDMI 1.3 performance at distances up to
100 meters. Gennum's solution can offer cable manufacturers a solution that
addresses this consumer demand. With strong industry support for its solution,
Gennum announced its HDMI/DVI solution has been adopted by Belden, a
manufacturer of cable solutions, in its HD5000 series HDMI cables.
Additionally, Gennum announced Gefen Inc., a global provider of audio/video
solutions, is leveraging Gennum's solution in its new VGA to HDMI Extender.

    Data Communications
    -------------------
    To leverage its continued success in TIA product offerings, Gennum
introduced two new additions to its lineup of wideband, low-noise
transimpedance amplifiers (TIAs) for next-generation SFP+ optical modules.
With Gennum's TIA architecture, OEMs are able to design optical modules
without the need for extensive testing across operating conditions, part
binning or device tuning. The new TIAs are sampling now with volume production
expected by January 2008.

    Audio and Wireless
    ------------------
    As announced in the second quarter, Gennum was working closely with
Genuity Capital Markets to explore various strategic alternatives for its
Audio and Wireless Division and Manufacturing Operations. In August, Gennum
announced the sale of its Consumer Headset product line to CellPoint Connect
AB. This transaction closed in late August.
    Additionally, Gennum and Sound Design Technologies, Ltd., a Gores Equity
portfolio company, announced the companies have reached a definitive agreement
for the purchase of Gennum's Hearing Instrument products and Manufacturing
Operations. This transaction is anticipated to close in our fiscal 2007 year.
The Company is continuing to review strategic alternatives for its FALCON
technology and results for FALCON are included in continuing operations.
Gennum is presently in discussions regarding a potential transaction for its
FALCON product line. However, there can be no assurance that any third party
transaction will be completed. The Company has $1.5 million in net assets
associated with FALCON as at August 31, 2007 and the loss from FALCON in
continuing operations was $0.7 million for the quarter and $2.8 million on a
year-to-date basis.

    Outlook

    According to the Semiconductor Industry Association (SIA), the outlook
for the global semiconductor market is growing in line with analysts
projections. The SIA is forecasting 2007 microchip sales growth to be
approximately 1.8%.
    The video market remained steady in the third quarter, with revenue
growing 1% over the second quarter. Further in-depth discussions with our key
video broadcast customers, indicate that their outlook for 2008 is expected to
be generally positive as various regions around the world continue to
transition from SD to HD. Specifically, indications are the North American
market will benefit from increased advertising revenue generated by the 2008
Olympics and the United States presidential election. This additional
advertising revenue will enable broadcasters to finance the new equipment
required to be in compliance with the US-based Digital Transmission Bill which
takes affect in the first quarter of 2009.
    Looking beyond North America, our Japanese customers are forecasting a
continued rebound in 2008. This will mainly be driven by the maintenance and
upgrades to existing domestic infrastructure equipment. Additionally, Japanese
video equipment manufacturers are gaining traction in foreign markets for
their HD solutions. The European market is expected to lag behind the growth
of North America and Asia. There are smaller regions in Europe beginning to
transition to HD; however, it has not reached critical mass across the
continent.
    A new market being penetrated by Gennum is consumer connectivity. As HD
consumer products continue to enter the market, consumers are demanding cables
that connect these devices not degrade the end-user experience irrespective of
how close or far these devices are from one another. Leveraging its knowledge
and core technologies in SDI video transport, Gennum introduced a solution
that enables cable manufacturers a cost-effective way to address this consumer
demand. Belden and Gefen, two industry leaders in cabling solutions, have
adopted Gennum's technology. Both product offerings from Belden and Gefen
enable full rate (10.2 Gb/s) consumer multimedia connectivity over extended
distances at prices competitive with existing solutions. Gennum will be
continuing product development and introductions for this market space as it
evolves.
    The Data Communications segment remains strong and we expect continued
growth in the 10Gb/s market. According to a 2007 report from Ovum Research,
10Gb/s optical transceiver shipments are expected to reach over 1.6 million
units in 2008 or a 60% increase over 2007. The transition to the newer SFP+
form factor continues as Ovum is forecasting total shipments to grow from
33,000 units to over 711,000 over the next two years. Our portfolio of TIAs,
laser drivers and CDR solutions will continue to see momentum over the next
few quarters as 10 Gb/s module shipments continue to ramp and our data
communication customers bring new SFP+ modules to market. During the third
quarter, Gennum took significant steps in its effort to align R&D and
resources on building a world-class optical, analogue and mixed-signal
portfolio. Gennum's exploration of various strategic alternatives for its VXP
Image Processing Group is part of the company's ongoing strategy to refine
this focus. To augment its portfolio for these markets, Gennum introduced
innovative 3Gb/s components and optical products to capture and further secure
its market position. Finally, Gennum is well positioned to capitalize on the
rising demand for optical, analogue and mixed-signal products in Asia and
North America as its global sales organization added resources and support in
regions critical to future growth. Management is confident these changes will
strengthen the Company and maximize shareholder value.

    Dividend

    Gennum's Board of Directors has declared a cash dividend of 3.5 cents per
share to be paid on October 24, 2007 to shareholders of record on October 10,
2007. The dividend is considered an "eligible dividend" for tax purposes.

    -------------------------------------------------------------------------
    Management will hold a conference call to discuss third quarter results
    on Thursday, September 27, 2007 at 9:00 a.m. (ET). To access the call,
    participants should dial 1-800-733-7560. 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 October 27, 2007. The rebroadcast can be
    accessed at (416) 640-1917 and by entering the passcode 21245130 followed
    by the number sign.
    -------------------------------------------------------------------------

    About Gennum

    Gennum Corporation (TSX: GND) is a leading designer and manufacturer of
semiconductor solutions for the global video and data communication 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 and backplane interconnects. Gennum is headquartered in
Burlington, Canada, and has global design, research and development and sales
offices in Canada, Japan, Korea, Taiwan 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 THIRD 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 successfully complete strategic alternative reviews of certain
parts of our business, our ability to implement chosen alternatives
successfully without disrupting ongoing business, exposure to currency rate
fluctuations, and the level of market acceptance of our new products, 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 third 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 third 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

    Gennum achieved significant milestones in the third quarter in its
efforts to streamline and leverage its core competencies to provide a
world-class portfolio of optical, analogue and mixed-signal solutions. As
announced in the second quarter, Gennum was working closely with Genuity
Capital Markets to explore various strategic alternatives for its Audio and
Wireless Division and manufacturing operations. In August, Gennum announced
the sale of its Consumer Headset product line to CellPoint Connect AB. This
transaction closed in late August.
    Additionally, Gennum and Sound Design Technologies, Ltd., a Gores Equity
portfolio company, announced the companies have reached a definitive agreement
for the purchase of Gennum's Hearing Instrument Division and Manufacturing
Operations. This transaction is anticipated to close in our fiscal 2007 year.
    As disclosed in the second quarter of 2007, Gennum was reviewing its
image processing portfolio and assessing possible actions to accelerate the
return on investment and achieve more significant scale. As a result of this
analysis, Gennum announced in August that it is working closely with Genuity
Capital Markets to explore strategic options for its VXP(TM) Image Processing
group, which includes advanced video processing algorithm intellectual
property (IP) and integrated semiconductor products for the broadcast,
professional-AV and consumer video processing markets. Gennum is presently in
discussions with several parties regarding a potential transaction or
transactions. However, there can be no assurance that any third party
transaction will be completed. Management believes these strategic changes are
necessary in order to focus on capturing new opportunities in markets where
optical, analogue and mixed signal solutions are in high demand.
    On a year-to-date basis, growth of our optical, analogue and mixed signal
product lines increased by 4% over the prior year. A series of new video
transport and data communications products were introduced recently, helping
to further expand Gennum's portfolio and drive future growth over the coming
quarters.
    In the third quarter of 2007, Gennum broadened its sales and support
efforts throughout Europe and Israel and selected BFi OPTiLAS, a leading
systems solutions distributor based in France, to represent its broad data
communications product portfolio. Europe is playing a pivotal role in high
speed data transfer applications today and the market is rapidly maturing to
the levels of North America and Asia. BFi OPTiLAS will enable Gennum to expand
its current sales and support network and will provide immediate access and
support for enterprise customers searching for advanced data communications
solutions. Additionally, Gennum signed a global distribution agreement with Nu
Horizons Electronics Corp., a leading global distributor of advanced
technology semiconductor, display, illumination, power and system solutions.
Nu Horizons will sell Gennum's industry-leading line of optical, analogue and
mixed-signal products. Nu Horizons has a strong global presence, particularly
in the two key regions of Europe and Asia.
    To complement the new distribution agreements and meet its global sales
expansion initiative, Gennum established new offices in Korea and Taiwan,
added new sales leadership and is opening an office in California's Silicon
Valley in order to better serve its global customers. This expansion allows
Gennum to capitalize on the rising demand for optical, analogue and mixed
signal technologies and products in Asia and North America.

    Assets Held for Sale and Discontinued Operations

    As a result of a Company wide portfolio review, the Company took action
in the quarter to divest of certain operations. As a result of these
decisions, the assets, liabilities, revenues and expenses related to the
Consumer Headset product line and Hearing Instrument Operations have been
segregated in the accompanying financial statements as held for sale and
discontinued operations. The assets and liabilities related to the
manufacturing operations have been classified as assets held for sale on the
balance sheet, with the exception of the land and building, which did not meet
the immediately available for sale criteria as at August 31, 2007. The land
and building continue to be classified as held for use until the required
severance work is completed on the property. The $9.6 million impairment
charge on the manufacturing facilities recorded in the second quarter
continues to be classified under continuing operations.
    On August 24, 2007, the Company sold its Consumer Headset product line,
which resulted in a loss of $0.3 million. In addition, the Company announced
that on September 8, 2007 a definitive agreement was signed to sell the
Hearing Instruments and Manufacturing Operations. Anticipated proceeds from
the sale are approximately $14.0 million in cash and the transaction is
expected to close in the fourth quarter. In accordance with Canadian generally
accepted accounting principles, the assets included in the sale, other than
long-lived assets, were reviewed for impairment in accordance with their
respective Canadian Institute of Chartered Accounts (CICA) Handbook sections.
As a result, provisions of $7.1 million were record on inventory, accounts
receivable and other as a loss under discontinued operations in the period.
    Continuing operations for the Company as of August 31, 2007 include the
Video and Data Communications business units, as well as certain remaining
operations related to the Audio and Wireless business unit. The Company is
continuing to review strategic alternatives for its FALCON(TM) technology and
results for FALCON are included in continuing operations. Gennum is presently
in discussions regarding a potential transaction for its FALCON product line.
However, there can be no assurance that any third party transaction will be
completed. The Company has $1.5 million in net assets associated with FALCON
as at August 31, 2007 and the loss from FALCON in continuing operations was
$0.7 million for the quarter and $2.8 million on a year-to-date basis. Also
included in the Audio and Wireless business unit's continuing operations are
the Barium Strontium Titanate (BST) related products.
    In August, the Company also announced a realignment of its leadership and
product divisions to place stronger emphasis and focus on optical, analogue
and mixed signal market opportunities. Specifically, Gennum has created an
Analogue and Mixed Signal Division, which will be managed by Dr. Martin
Rofheart as Senior Vice President and General Manager. Gennum's optical
products for both video and data communications will now be incorporated into
a single Optical Products Division, which will be led by Gary Beauchamp,
Senior Vice President and General Manager. The VXP Group will be led by David
Lynch as Senior Vice President and General Manager. Finally, Alan Ferguson
assumes the position of Vice President of Business Development, as the Company
continues to explore new market opportunities for its broad portfolio of
products and technologies.
    Over the next quarter, Gennum will be working to realign its reporting
structure under the new leadership. Until such time, which is anticipated to
be on December 1, 2007, the Company will continue to report under the existing
Video, Data Communications and Audio and Wireless business units.

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

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Revenue           28.6      28.4       0.5      85.5      82.0       4.2
    Gross margin      20.6      21.5      (4.0)     64.0      62.4       2.6
    Asset impairment     -         -         -       9.6         -       n/a
    Earnings from
     continuing
     operations
     before income
     taxes             6.2       6.7      (7.1)      7.7      17.7     (56.6)
    As a % of
     revenue          21.7      23.5                 9.0      21.5

    Net earnings
     before
     discontinued
     operations        3.7       4.3     (14.0)      4.3      11.9     (63.5)
    Discontinued
     operations       (5.3)      2.0       n/a      (8.7)      2.6       n/a
    Net (loss)
     earnings         (1.6)      6.3       n/a      (4.3)     14.5       n/a

    Continuing
     operations EPS   0.10      0.12      16.7      0.12      0.33      63.6
    Net (loss)
     earnings per
     share           (0.04)     0.18       n/a     (0.12)     0.40       n/a

    Cash & short
     term
     investments      45.0      40.0      12.3      45.0      40.0      12.3
    -------------------------------------------------------------------------

    Revenue from continuing operations in the third quarter of 2007 showed a
slight increase compared to the prior year. Year-to-date revenue was up 4.2%
or $3.5 million as compared to the prior year. Revenue excludes the
discontinued operations of the Audio and Wireless Division's Hearing
Instrument and Consumer Headset Operations for both periods. The stronger
Canadian dollar impacted revenue negatively by $1.8 million on a
quarter-over-quarter basis and by $2.1 million year over year.

    Revenue
    (in millions of dollars)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Video             22.2      22.4      (0.6)     66.9      68.5      (2.3)
    Data
     Communications    6.0       5.4       9.1      17.5      12.3      42.2
    Audio & Wireless   0.4       0.6     (38.5)      1.1       1.2     (13.1)
    -------------------------------------------------------------------------
    Total Revenue     28.6      28.4       0.5      85.5      82.0       4.2
    -------------------------------------------------------------------------
    

    Video Products

    Revenue generated from Gennum's video products portfolio totalled
$22.2 million in the third quarter of 2007, remaining relatively flat compared
to the same quarter in the prior year. The strengthening of the Canadian
dollar reduced revenue in the period by $1.4 million compared to the prior
year.
    Global video revenue from high-definition (HD) products increased by 14%
compared to the same quarter in 2006. On a geographical basis, North American
demand for HD products increased 19% compared to the third quarter of 2006 and
revenue increased 11% compared to the second quarter of 2007. We believe the
increase versus the second quarter of 2007 is primarily driven by the need for
studios to meet the requirements of the US-based Digital Transmission Bill.
    European revenue for HD products remained flat in the third quarter of
2007 compared to 2006. The European market remains fractured around the mass
deployment of HD broadcast. More local HD developments have started, but not
in considerable volume. Additionally, European broadcast equipment
manufacturers continue to experience difficulties penetrating and securing
market share in North America.
    The Japan market experienced its second consecutive quarter of growth as
HD sales to Japanese customers were up 16% in the quarter versus the same
period in 2006. In a comparison to the second quarter of 2007, HD sales
increased by 10% primarily as a result of increased unit volume. Gennum
continues to see HD sales in the Japanese domestic market primarily for
maintenance and upgrade requirements. We expect ongoing sales to Japanese
original equipment manufacturer (OEM) customers to strengthen as they continue
to ramp exports of video products to support HD conversion in foreign markets.
    In a step to further broaden its 3 Gigabits per second (Gb/s) portfolio
offering, Gennum introduced a suite of new products for HD applications
requiring 3Gb/s technology. With the demand for 1080p50/60 content creation
being one of the key drivers for higher capacity SDI transport, Gennum
introduced a reference design and development board to deliver 3Gb/s
transmission using existing dual-link equipment. By combining its video
broadcast components onto a single board, Gennum enables OEMs and original
design manufacturers (ODMs) of both professional and "prosumer" video
broadcast equipment to develop, test and prototype 3Gb/s SDI applications
today. Gennum's new reference design enables migration to 3Gb/s for many
applications, including video cameras, camcorders, DVRs/VTRs and 3Gb/s test
signal generation.
    Gennum unveiled its new multi-rate equalizer which achieves 120 meters
for 3Gb/s transmission. Equalizers are used to equalize and restore signals
over co-axial cable for applications such as digital video routers, video
production switchers, distribution amplifiers, cameras, monitors, VTRs and
professional A/V systems. The new equalizer enables broadcast equipment
manufacturers to leverage the existing cabling they have by providing a
solution that delivers the 3Gb/s and HD performance they need at longer
distances. The additional distance is critical as the broadcast industry
transitions its infrastructure to 3Gb/s yet wants to leverage their existing
cables and equipment investments.
    Additionally, Gennum announced availability of its 3Gb/s optical modules;
an optical solution for video broadcast equipment customers allowing them the
ability to move 1080p50/60 video, HD 4:4:4 video and HD 12 bit video formats
over a single serial link vs. dual link. This is a key step forward in cost,
power and area reductions enabling broadcast equipment manufacturers the
ability to achieve a data rate of 3Gb/s over a single optical serial link. In
September, Utah Scientific introduced new optical routers leveraging Gennum
technology. Also, Network Electronics and Gennum hosted a live demo at this
year's International Broadcasting Convention to showcase the capability of the
new optical modules. Applications for Gennum's new 3Gb/s optical modules
include cameras, routers, monitors, video production switchers and
distribution amplifiers.
    Leveraging its expertise in HD video transport, Gennum unveiled a new
HDMI/DVI high-performance solution which enables disparate products to connect
and stream multimedia at the full HDMI 1.3 performance at distances up to
100 meters. As HD consumer products continue to penetrate the market,
consumers are demanding the cables that connect these devices not degrade the
end-user experience irrespective of how close or far these devices are from
one another. Gennum's solution can offer cable manufacturers a solution that
addresses this consumer demand. The new solution supports current and legacy
versions of HDMI, including 1.1, 1.2 and 1.3, enabling backward compatibility
with existing equipment. With strong industry support for its solution, Gennum
announced its HDMI/DVI solution has been adopted by Belden, a manufacturer of
cable solutions, in its HD5000 series HDMI cables. Additionally, Gennum
announced Gefen Inc., a global provider of audio/video solutions, is
leveraging Gennum's solution in its new VGA to HDMI Extender.
    Sales for standard definition (SD) products continued to decline as
studios continue to focus on upgrading their equipment to support HD and
multi-standard capabilities. On a global basis, SD products had a 28%
reduction in revenue compared to the prior year.
    In the third quarter of 2007, Gennum's revenue from its VXP image
processing portfolio decreased more than 18% on a relatively small base
compared to the prior year as key customers transitioned from our previous
generation products to the new versions and product ramps for new customers
were delayed. Revenue growth is expected as these new designs move into
applications such as medical monitors, projectors and high-end flat panel
displays later in the year. Image processing sales were primarily from North
America in which sales increased 4% compared to the second quarter of 2007.
    Video products revenue represented 78% of the total Gennum consolidated
revenue in the third quarter of 2007 (2006 - 79%). In the first nine months of
2007, video products represented 78% of the total Gennum consolidated revenue
(2006 - 84%). Revenue generated from the HD-SDI market represented 71% of the
total video revenue in the third quarter of 2007 (2006 - 62%).
    In the third quarter of 2007, 70% of video revenue came from US dollar
sales (2006 - 71%) while 28% came from sales in Japanese yen (2006 - 24%). In
the first nine months of 2007, 69% of video revenue came from the US dollar
sales (2006 - 67%) while 27% came from sales in Japanese yen (2006 - 27%).

    Data Communications

    The Data Communications Division achieved its fifth consecutive
profitable quarter as revenue rose 9% to $6.0 million in the third quarter of
2007, compared to $5.5 million in 2006. The stronger Canadian dollar reduced
revenue by $0.4 million compared to the prior year. Due to an increase in
sales of transceiver products, the Data Communications Division reported
revenue of $17.5 million for the first nine months of 2007 which is an
increase of 42% compared to the same period last year.
    The market for 10Gb/s optical transceivers continues to grow and Gennum's
revenue increase is primarily attributable to sales of high-speed 10Gb/s
optical transceiver ICs. In the third quarter of 2007, revenue from our 10Gb/s
CDRs, which are sold exclusively to the 10Gb/s XFP optical transceiver market,
increased 21% versus 2006. Revenue from our 10Gb/s transimpedance amplifiers
(TIAs), which are sold to all 10Gb/s optical transceiver types (including
XFP), increased 40% versus 2006. On a year-to-date basis, revenue from our
10Gb/s CDRs and 10Gb/s TIAs increased 42% and 82%, respectively, compared to
the same period in 2006.
    To leverage its continued success in TIA product offerings, Gennum
introduced two new additions to its lineup of wideband, low-noise TIAs for
next-generation SFP+ optical modules. With Gennum's TIA architecture, OEMs are
able to design optical modules without the need for extensive testing across
operating conditions, part binning or device tuning. The added benefits of low
power consumption, increased sensitivity and high bandwidth capability will
enable customers to deploy Gennum's TIAs in next-generation SFP+ optical
modules for SONET and 10GE applications. The new TIAs are sampling now with
volume production expected by January 2008.
    In the quarter, design-in activity for the new 10Gb/s SFP+ optical
transceiver accelerated with several design wins with leading Asian and North
American module manufacturers for existing as well as new products. Initial
SFP+ product deliveries will occur in the fourth quarter of 2007 and they are
expected to accelerate in early 2008 as customers enter production with their
first generation SFP+ products.
    Sales were down 52% 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
router SerDes, as a key customer switchover to a lean manufacturing model
continues and the demand softens as the product matures. Given the strong
growth in our optical transceiver components business in recent years, which
has been the main focus of the division, the backplane product sales now
account for a relatively small percentage of the division's sales (less than
20%).
    Data communications products revenue represented 21% of the total Gennum
consolidated revenue in the third quarter of 2007 (2006 - 19%). For the first
nine months of 2007, data communications products revenue represented 20%
(2006 - 15%) of the total Gennum consolidated revenue.
    In the third quarter of 2007, 72% of the data communications revenue came
from US dollar sales (2006 - 68%) while 28% came from sales in Japanese yen
(2006 - 31%). For the first nine months of 2007, 76% of data communications
revenue came from US dollar sales (2006 - 69%) while 24% came from sales in
Japanese yen (2006 - 31%).

    Audio and Wireless

    Revenue from continuing operations in audio and wireless products was
$0.4 million in the third quarter of 2007 compared to $0.6 million in the same
period last year. This revenue is primarily related to the payment of design
fees from a lead customer for BST related product.

    
    Gross margin
    (in millions of dollars)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Gross Margin      20.6      21.5      (4.0)     64.0      62.4       2.6
    Percentage of
     revenue          72.1      75.5                74.9      76.1
    -------------------------------------------------------------------------

    Gross margin as a percentage of revenue in the third quarter of 2007 was
72.1%, compared to 2006 third quarter gross margin of 75.5%. Gennum made good
productivity and cost improvements; however, they were offset by selling price
erosion and the impact of the strengthening Canadian dollar. Gross margin for
the year to date was 74.9% compared to 76.1% for the prior year.

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

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Sales, marketing
     and
     administration
     expense           7.1       7.3       3.0      22.7      21.4      5.8
    Percentage of
     revenue          24.8      25.7                26.5      26.1
    -------------------------------------------------------------------------

    On a year-to-date basis, sales, marketing and administration expenses
increased by $1.3 million to $22.7 million, compared to $21.4 million in 2006.
However, during the third quarter of 2007, sales, marketing and administration
expenditures of $7.1 million were slightly lower than the same period last
year. Higher salary, recruiting and legal costs were more than offset by lower
incentive compensation costs. 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             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    R&D expense
     (gross)           9.5      10.5      (9.3)     29.7      31.4      (5.5)
    Percentage of
     revenue          33.3      36.9                34.7      38.3
    -------------------------------------------------------------------------

    R&D spending in the third quarter of 2007 and year to date was lower
compared to the same period in 2006. Lower incentive compensation accruals
were partially offset by higher salary costs. FALCON costs were lower in the
current year due to the reassignment of some personnel to the Hearing
Instrument Division, which has been classified as discontinued operations. The
reduction in spending on FALCON was partially offset by higher spending on the
development of BST technology.

    Asset impairment
    (in millions of dollars)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Asset impairment     -         -         -       9.6         -       n/a
    Percentage of
     revenue             -         -                11.2         -
    -------------------------------------------------------------------------

    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 assemble hybrids for the Audio & 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 that the carrying value of the manufacturing
facility 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.
    A definitive agreement to sell the manufacturing facility was signed
subsequent to the third quarter end, but as the criteria for discontinued
operations was not met in accordance with Canadian generally accepted
accounting principles as at August 31, 2007, this impairment remains
classified as continuing operations.

    Other income (expense)
    (in millions of dollars)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Other income
     (expense)         0.1       0.7     (79.2)     (1.0)      1.0       n/a
    Percentage of
     revenue           0.5       2.4                 n/a       1.2
    -------------------------------------------------------------------------

    Other income in the third quarter of 2007 was primarily related to a
$0.3 million foreign exchange gain (2006 - $0.8 million foreign exchange
gain). This gain is a result of a $0.5 million gain on foreign exchange
contracts, partially offset by a translation loss of $0.2 million (2006 -
$0.5 million gain on foreign exchange contracts and a translation gain of
$0.3 million).

    Income taxes
    (in millions of dollars)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Income taxes       2.5       2.4       5.0       3.3       5.8     (42.4)
    -------------------------------------------------------------------------

    Income taxes for the nine months ended August 31, 2007 represented 43.3%
of earnings before taxes, compared to income taxes of 32.6% of earnings before
taxes for the same period in 2006.  The effective tax recovery rate in the
first nine months of 2007 was above the statutory tax rate of 34.1% due
primarily to permanent differences such as stock option amortization and the
impact of tax rate changes on future income tax assets.

    Net earnings from continuing operations
    (in millions of dollars except earnings per share)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Net earnings
     from continuing
     operations        3.7       4.3     (14.0)      4.3      11.9     (63.5)
    Net earnings
     from continuing
     operations as %
     of revenue       12.8      15.0                 5.1      14.5
    Basic earnings
     from continuing
     operations per
     share            0.10      0.12                0.12      0.33
    -------------------------------------------------------------------------
    

    In the third quarter of 2007, net earnings from continuing operations
were $3.7 million, or $0.10 per share, compared with net earnings from
continuing operations of $4.3 million, or $0.12 per share in the third quarter
of 2006. The lower earnings were mainly attributable to lower gross margins
and lower foreign exchange gains in the quarter compared to the prior year's
third quarter.
    Within the business segments, the Video Division's operating earnings
decreased $0.4 million from $6.9 million to $6.5 million. This is mainly due
to price erosion and slower than anticipated sales in the third quarter for SD
products globally and HD products in Europe.
    The Data Communications Division operating earnings for the third quarter
of 2007 matched the performance of the same quarter last year at $0.8 million.
    The remaining operations in the Audio and Wireless Division which
includes the FALCON technology portfolio incurred losses of $1.7 million
compared to $2.1 million in the third quarter of 2006 as some resources were
redirected to other projects in the discontinued Hearing Instrument
Operations.

    
    Discontinued operations, net of tax
    (in millions of dollars)

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Consumer headsets (0.3)     (0.7)    (55.3)     (3.0)     (2.0)     50.5
    Hearing
     instruments      (5.0)      2.7       n/a      (5.7)      4.6       n/a
    -------------------------------------------------------------------------
    Total
     discontinued
     operations, net
     of taxes         (5.3)      2.0                (8.7)      2.6
    Percentage of
     revenue           n/a       7.2                 n/a       3.2
    -------------------------------------------------------------------------
    

    On August 24, 2007, the Company sold its Consumer Headset product line,
which resulted in a pre-tax loss on sale of $0.3 million. As part of its
strategic review, the Company also took action during the quarter to sell its
Hearing Instrument and Manufacturing Operations. In accordance with GAAP, the
Consumer Headset product line and the Hearing Instrument Operations were
reported as assets held for sale on the balance sheet and discontinued
operations on the consolidated statement of earnings. The manufacturing
operations have been reported as held for sale, with the exception of the land
and building, which did not meet the criteria as at August 31, 2007. The
manufacturing operations also did not meet the criteria for discontinued
operations as at August 31, 2007, and therefore has been classified as
continuing operations, including the $9.6 million impairment charge recorded
on the manufacturing facilities in the second quarter.
    On September 8, 2007, the Company entered into a definitive agreement to
sell the Hearing Instrument and Manufacturing Operations. Anticipated proceeds
from the sale are approximately $14.0 million in cash and the transaction is
expected to close in the fourth quarter. As a result of classifying the
Hearing Instruments and Manufacturing Operations as held for sale, the assets
classified as such were reviewed for impairment in accordance with their
respective Handbook sections. As a result, a provision of $7.1 million related
to inventory, accounts receivable and other was recorded as a loss under
discontinued operations in the period.
    The comparative profit was primarily a result of analogue product
shipments as customers purchased end-of-life products. Losses from the FALCON
and technology products are included in continuing operations as are a portion
of the corporate allocations. The latter represents corporate costs that will
remain with the continuing business.

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

                         Three Months Ended             Nine Months Ended
                              August 31                     August 31
                      2007      2006  % change      2007      2006  % change
    -------------------------------------------------------------------------
    Net (loss)
     earnings         (1.6)      6.3       n/a      (4.3)     14.5       n/a
    Net (loss)
     earnings as %
     of revenue        n/a      22.2                 n/a      17.7

    Basic earnings
     per share       (0.04)     0.18               (0.12)     0.40
    -------------------------------------------------------------------------

    In the third quarter of 2007, net losses were $1.6 million, or $0.04 per
share, compared with net earnings of $6.3 million, or $0.18 per share in the
third quarter of 2006.

    Quarterly Results
    (in millions of dollars except earnings per share)
    -------------------------------------------------------------------------
                          Third        Second         First        Fourth
                         Quarter       Quarter       Quarter       Quarter
                       2007   2006   2007   2006   2007   2006   2006   2005
    -------------------------------------------------------------------------
    Revenue            28.6   28.4   28.8   28.7   28.1   24.9   27.9   28.6

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

    Net (loss)
     earnings before
     discontinued
     operations         3.7    4.9   (4.1)   4.3    4.8    3.3    3.1    5.7

    Net (loss)
     earnings          (1.6)   6.3   (7.0)   4.5    4.3    3.7    2.8    5.3

    Continuing
     operations EPS    0.10   0.12  (0.11)  0.12   0.13   0.09   0.08   0.16

    Net (loss)
     earnings per
     share
      - basic         (0.04)  0.18  (0.20)  0.13   0.12   0.10   0.08   0.15
      - diluted       (0.04)  0.18  (0.19)  0.12   0.12   0.10   0.08   0.15
    -------------------------------------------------------------------------
    

    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 August 31, 2007 was $45.0 million, a decrease of $2.5 million from the end of the 2006 fiscal year. This was primarily due 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. Cash generated in continuing operating activities was $2.4 million for the quarter, compared to cash generated of $10.7 million in the third quarter of 2006. This reduction was primarily 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 August 31, 2007, the accounts receivable balance was $17.4 million, which is up $1.9 million compared to the end of the 2006 fiscal year. Both the August 31 and the November 30 balances exclude receivables related to the assets held for sale. The increase is mainly due to stronger revenue in the latter part of the quarter offset by the strengthening of the Canadian dollar. There were no material write-offs during the quarter. Inventories Inventories of $14.2 million at August 31, 2007 were consistent with the end of the 2006 fiscal year. Both the August 31 and the November 30 balances exclude inventory related to the assets held for sale. Instruments held for trading and long-term investments As a result of the new accounting standards adopted in 2007, our investment in Nanoscience, Inc is recorded on the balance sheet at its market value of $2.0 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. An additional loss on the investment of $0.5 million was recorded to other comprehensive income in the first nine months of the year to reflect a downward 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. On August 24, 2007, the Company received a 9% interest, or $2.0 million in shares of CellPoint Connect AB (2.3 million shares), as consideration for the sale of its Consumer Headset product line. The agreement with CellPoint requires them to repurchase $1.0 million of the shares at a fixed price (based on the price at which the shares were issued) in two installments within the next six months. As a result, $1.0 million of the shares have been recorded as a short-term investment. The shares of CellPoint are traded on the AktieTorget stock exchange in Sweden and have a market value of $1.7 million as at August 31, 2007 (based on a combination of the trading price at August 31, the price at which the shares were issued and the impact of currency fluctuations). Under the new standards, half of this investment has been classified as available-for-sale and is therefore recorded on the balance sheet at its fair value with the unrealized loss of $0.3 million recorded to other comprehensive income for the quarter. The other half of this investment has been classified as held-for-trading and is therefore recorded on the balance sheet at its fair value with fluctuations recorded to the statement of earnings (none to date). Accounts payable and accrued liabilities Accounts payable and accrued liabilities at August 31, 2007 were $8.0 million, which represents a decrease of 47% or $7.1 million compared to the end of fiscal 2006. Both the August 31 balance and the November 30 balance exclude payables related to the liabilities held for sale. The reduction resulted primarily from the payment of the 2006 accruals under the Company's incentive compensation plans and the minimal related accruals to date for 2007. In addition, severance accruals are lower as the majority of the severance accruals related to the restructuring action taken in 2006 have been paid. Total assets Total assets as at August 31, 2007 were $153.2 million, a decrease of $17.2 million from the 2006 year end, resulting primarily from the capital asset impairment of $9.6 million and the impairment of inventory and accounts receivable related to Hearing Instrument and Manufacturing Operations of $7.1 million. Capital expenditures Capital additions were $3.0 million in the first nine months of 2007 compared to $3.9 million in the same period in 2006. Capital additions in 2007 consisted primarily of R&D items (64%) and manufacturing equipment (15%). 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 third quarter of 2007 (2006 - $1.3 million, or $0.035 per share). Dividend paid for the year to date was $3.8 million, or $0.105 per share, (2006 - $3.6 million, or $0.10 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 third quarter of 2007 for a discussion on the changes. As at August 31, 2007, we had entered into foreign exchange forward contracts to sell an aggregate amount of US $12.6 million and Japanese yen 1,030 million. These contracts mature at the latest on June 24, 2008, at exchange rates varying between Canadian $1.0470 and Canadian $1.1545 against the US dollar, and between Canadian $0.00906 and Canadian $0.00993 against the Japanese yen. Management estimates that a gain of $0.7 million would be realized if the contracts were terminated on August 31, 2007. In accordance with new accounting standards effective this year, these forward contracts are considered cash flow hedges and therefore this gain, net of a future income tax asset of $0.2 million, has been included in other comprehensive income. This gain is expected to be reclassified to net income over the next twelve months as the forward contracts mature. Realized gains on foreign exchange forward and spot contracts were $0.5 million during the 2007 third quarter (2006 - gains of $0.5 million). CONTRACTUAL OBLIGATIONS (in thousands of dollars) ------------------------------------------------------------------------- Payments Due by Period ---------------------- Less than Total 1 year 1-3 years 4+ years ------------------------------------------------------------------------- Operating leases 13,722 3,493 7,007 3,222 Purchase obligations(1) 5,728 5,714 14 - License fee obligations and other 2,351 1,613 570 168 ------------------------------------------------------------------------- Total contractual obligations 21,801 10,820 7,591 3,390 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. Authorized capital projects in addition to the purchase obligations totalled $11.2 million. 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. The plaintiff has appealed the decision of the Court, and the parties are presently exchanging briefs. 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 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 August 31, 2007. The Company follows the guidance in the 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. The Company follows the guidance in the CICA Handbook Section 3475, "Disposal of long-lived assets and discontinued operations" in classifying certain of its operations as held for sale and discontinued operations. Assets classified as held for sale other than long-lived assets were reviewed for impairment in accordance with their specific CICA Handbook Sections. Long-lived assets were then recorded at the lower of carrying amount or fair value less cost to sell. 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 $0.4 million in the first nine months 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 second quarter based on independent quoted market prices which remains in continuing operations. These assets were sold subsequent to August 31, 2007. CONTROLS AND PROCEDURES There have been no changes in the Company's internal control over financial reporting during the first nine months of 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. COMMON SHARES OUTSTANDING At August 31, 2007, there were 35,775,086 common shares of Gennum outstanding, compared with 35,784,636 shares at November 30, 2006. At September 26, 2007, there were 35,775,086 common shares outstanding. On June 28, 2007, the Company announced a normal course issuer bid to acquire for cancellation up to 3,458,782 of its common shares (approximately 10% of the public float). The bid commenced on July 3, 2007 and will expire on July 2, 2008. Under this bid, the Company repurchased 35,200 common shares for approximately $0.4 million in the third quarter. The June 28, 2007 bid replaces the Company's previous normal course issuer bid, which expired on June 29, 2007. Under that bid, the Company purchased a total of 212,300 of its common shares. 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 maintaining diverse revenue streams across several product areas, we believe we can mitigate the risk associated with any difficulties encountered in any one product line or market. With recent strategic alternative reviews we have undertaken in respect of certain parts of our business, Gennum is subject to the risk that we will be unable to successfully complete such reviews, or to implement our chosen alternatives successfully without disrupting our ongoing business. A comprehensive planning process exists to identify risks and minimize them wherever possible. OUTLOOK According to the Semiconductor Industry Association (SIA), the outlook for the global semiconductor market is growing in line with analysts projections. The SIA is forecasting 2007 microchip sales growth to be approximately 1.8%. The video market remained steady in the third quarter, with revenue growing 1% over the second quarter. Further in-depth discussions with our key video broadcast customers, indicate that their outlook for 2008 is expected to be generally positive as various regions around the world continue to transition from SD to HD. Specifically, indications are the North American market will benefit from increased advertising revenue generated by the 2008 Olympics and the United States presidential election. This additional advertising revenue will enable broadcasters to finance the new equipment required to be in compliance with the US-based Digital Transmission Bill which takes affect in the first quarter of 2009. Looking beyond North America, our Japanese customers are forecasting continued momentum in 2008. This will mainly be driven by the maintenance and upgrades to existing domestic infrastructure equipment. Additionally, Japanese video equipment manufacturers are gaining traction in foreign markets for their HD solutions. The European market is expected to lag behind the growth of North America and Asia. There are smaller regions in Europe beginning to transition to HD; however, it has not reached critical mass across the continent. A new market being penetrated by Gennum is consumer connectivity. As HD consumer products continue to enter the market, consumers are demanding cables that connect these devices not degrade the end-user experience irrespective of how close or far these devices are from one another. Leveraging its knowledge and core technologies in SDI video transport, Gennum introduced a solution that provides cable manufacturers a cost-effective way to address this consumer demand. Belden and Gefen, two industry leaders in cabling solutions, have adopted Gennum's technology. Both product offerings from Belden and Gefen enable full rate (10.2Gb/s) consumer multimedia connectivity over extended distances at prices competitive with existing solutions. Gennum will be continuing product development and introductions for this market space as it evolves. The Data Communications segment remains strong and we expect continued growth in the 10Gb/s market. According to a 2007 report from Ovum Research, 10Gb/s optical transceiver shipments are expected to reach over 1.6 million units in 2008 or a 60% increase over 2007. The transition to the newer SFP+ form factor continues as Ovum is forecasting total shipments to grow from 33,000 units to over 711,000 over the next two years. Our portfolio of TIAs, laser drivers and CDR solutions will continue to see momentum over the next few quarters as 10Gb/s module shipments continue to ramp and our data communication customers bring new SFP+ modules to market. During the third quarter, Gennum took significant steps in its effort to align R&D and resources on building a world-class optical, analogue and mixed-signal portfolio. Gennum's exploration of various strategic alternatives for its VXP Image Processing Group is part of the company's ongoing strategy to refine this focus. To augment its portfolio for video and data communication markets, Gennum introduced innovative 3Gb/s components and optical products to capture and further secure its market position. Finally, Gennum is well positioned to capitalize on the rising demand for optical, analogue and mixed-signal products in Asia and North America as its global sales organization added resources and support in regions critical to future growth. Management is confident these changes will strengthen the Company and maximize shareholder value. September 26, 2007 GENNUM CORPORATION Unaudited Consolidated Financial Statements For the Nine Months ended August 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 August November 31, 2007 30, 2006 ------------------------------------------------------------------------- (unaudited) (audited) ASSETS Current Cash and short-term investments 44,961 47,421 Instruments held for trading (note 5) 1,000 - Accounts receivable 17,354 15,478 Inventories 14,180 14,224 Prepaid expenses and other assets 4,201 2,528 Income taxes receivable 2,374 - Future income taxes 13,803 10,892 Assets held for sale (notes 2 and 3) 9,910 25,282 ------------------------------------------------------------------------- Total current assets 107,783 115,825 ------------------------------------------------------------------------- Capital assets, net (note 4) 30,060 41,066 Long-term investments (note 5) 2,730 3,217 Intangible assets, net (note 7) 1,990 2,313 Loan receivable (note 6) 650 - Promissory note receivable (note 6) 288 - Long-term prepaid royalty 1,272 1,222 Goodwill 2,531 2,531 Future income taxes 5,304 2,051 Assets held for sale (notes 2 and 3) 568 2,207 ------------------------------------------------------------------------- 153,176 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 8,030 15,092 Income taxes payable - 432 Future income taxes 1,663 2,594 Liabilities related to assets held for sale (notes 2 and 3) 2,594 2,956 ------------------------------------------------------------------------- Total current liabilities 12,287 21,074 ------------------------------------------------------------------------- Future income taxes 63 66 ------------------------------------------------------------------------- Shareholders' equity Capital stock (note 8) 11,288 11,001 Deferred compensation (1,249) (2,148) Retained earnings 134,607 143,068 Contributed surplus 906 94 Accumulated other comprehensive loss (note 9) (4,726) (2,723) ------------------------------------------------------------------------- Total shareholders' equity 140,826 149,292 ------------------------------------------------------------------------- 153,176 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 14) Gennum Corporation CONSOLIDATED STATEMENT OF EARNINGS (unaudited) (Canadian dollars, amounts in thousands except per share data) Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue (note 11) 28,569 28,430 85,457 82,016 Cost of goods sold 7,958 6,966 21,426 19,587 ------------------------------------------------------------------------- Gross margin 20,611 21,464 64,031 62,429 Sales, marketing and administration expense 7,089 7,311 22,665 21,429 Research and development expense 9,510 10,486 29,655 31,374 Less government assistance (1,611) (1,911) (5,245) (6,020) ------------------------------------------------------------------------- 5,623 5,578 16,956 15,646 Asset impairment (note 4) - - (9,595) - Investment income 439 412 1,342 1,055 Other income (expense) (note 12) 144 691 (1,038) 956 ------------------------------------------------------------------------- Earnings from continuing operations before income taxes 6,206 6,681 7,665 17,657 Provision for income taxes (note 13) 2,542 2,421 3,320 5,764 ------------------------------------------------------------------------- Net earnings for the period, before discontinued operations 3,664 4,260 4,345 11,893 Discontinued operations (notes 2 and 3) (5,253) 2,061 (8,673) 2,595 ------------------------------------------------------------------------- Net (loss) earnings for the period (1,589) 6,321 (4,328) 14,488 Retained earnings, beginning of period 137,823 138,597 143,068 132,765 Dividends (1,253) (1,261) (3,759) (3,596) Repurchase of common shares (note 8) (374) (2,179) (374) (2,179) ------------------------------------------------------------------------- Retained earnings, end of period 134,607 141,478 134,607 141,478 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (Loss) earnings per share Continuing operations - basic and diluted 0.10 0.12 0.12 0.33 Discontinued operations - basic and diluted (0.14) 0.06 (0.24) 0.07 ------------------------------------------------------------------------- Net (loss) earnings - basic and diluted (0.04) $0.18 (0.12) $0.40 ------------------------------------------------------------------------- Dividends declared per share $0.035 $0.035 $0.105 $0.10 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Capital stock Balance at beginning of period 11,300 11,067 11,001 9,392 Proceeds from shares issued on exercise of options - - 299 1,675 Shares repurchased under normal course issuer bid (12) - (12) - ------------------------------------------------------------------------- Balance at end of period 11,288 11,067 11,288 11,067 ------------------------------------------------------------------------- Deferred compensation Balance at beginning of period (1,524) (1,326) (2,148) (1,383) New awards - - (33) (160) Forfeitures 98 267 293 86 Amortization 177 131 639 529 ------------------------------------------------------------------------- Balance at end of period (1,249) (928) (1,249) (928) ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 137,823 138,597 143,068 132,765 Net (loss) earnings (1,589) 6,321 (4,328) 14,488 Dividends (1,253) (1,261) (3,759) (3,596) Repurchase of common shares (374) (2,179) (374) (2,179) ------------------------------------------------------------------------- Balance at end of period 134,607 141,478 134,607 141,478 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of period 579 - 94 - Stock option amortization 327 - 812 - ------------------------------------------------------------------------- Balance at end of period 906 - 906 - ------------------------------------------------------------------------- Accumulated other comprehensive (loss) income, net of income taxes Balance at beginning of period (3,897) (3,104) (2,723) (3,264) Transition adjustment on adoption of financial instruments standards - - (782) - Other comprehensive (loss) income for the period (note 9) (829) (377) (1,221) (177) ------------------------------------------------------------------------- Balance at end of period (4,726) (3,441) (4,726) (3,441) ------------------------------------------------------------------------- Total shareholders' equity at end of period 140,826 148,176 140,826 148,176 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Net (loss) earnings for the period (1,589) 6,321 (4,328) 14,488 Other comprehensive income, net of income taxes Change in unrealized (losses) gains on translating financial statements of self-sustaining foreign operations 361 (377) (1,009) (177) Change in gains on derivative instruments designated as cash flow hedges(1) (27) - 706 - Reclassification to earnings of losses on cash flow hedges(2) (364) - (181) - Change in unrealized gains on available-for-sale financial assets(3) (799) - (737) - ------------------------------------------------------------------------- Comprehensive income (loss) for the period (2,418) 5,944 (5,549) 14,311 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Net of income taxes of $354 year to date (2) Net of income taxes of $94 year to date (3) There are no income tax implications as it is more likely that the Company will not use capital loss carryforwards Gennum Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings from continuing operations for period 3,664 4,260 4,345 11,893 Items not affecting cash Asset impairment - - 9,595 - Depreciation and amortization 1,364 2,077 4,910 6,540 Deferred compensation & option amortization 504 398 1,451 615 Loss on sale of headset assets 335 - 335 - Gain on financial instrument valuation 59 - (63) - Future income taxes (1,531) 224 (7,348) (2,307) ------------------------------------------------------------------------- 4,395 6,959 13,225 16,741 Net change in non-cash working capital balances related to operations (2,009) 3,709 (15,567) (6,815) ------------------------------------------------------------------------- Cash (used) provided by operating activities 2,386 10,668 (2,342) 9,926 ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of capital assets (946) (1,564) (3,037) (3,876) Payment of license fees (235) (8) (328) (243) Loans advanced (650) - (650) - ------------------------------------------------------------------------- Cash used in investing activities (1,831) (1,572) (4,015) (4,119) ------------------------------------------------------------------------- FINANCING ACTIVITIES Stock options exercised - - 299 1,675 Deferred compensation forfeited (awarded) 98 - 260 (160) Shares repurchased under normal course issuer bid (386) (2,179) (386) (2,179) Dividends paid (1,253) (1,261) (3,759) (3,596) ------------------------------------------------------------------------- Cash used in financing activities (1,541) (3,440) (3,586) (4,260) ------------------------------------------------------------------------- DISCONTINUED OPERATIONS Operating activities 4,884 (1,590) 8,269 (144) Investing activities (75) (120) (293) (289) ------------------------------------------------------------------------- Cash (used) provided in discontinued operations 4,809 (1,710) 7,976 (433) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and short-term investments 141 (220) (493) (184) ------------------------------------------------------------------------- Net increase (decrease) in cash and short-term investments during the period 3,964 3,726 (2,460) 930 Cash & short-term investments, beginning of period 40,997 36,316 47,421 39,112 ------------------------------------------------------------------------- Cash and short-term investments, end of period 44,961 40,042 44,961 40,042 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 accounting 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 accounting 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 accounting 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 accounting standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new accounting 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 accounting 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 accounting 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 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. f) Held for Sale and Discontinued Operations The Company follows the guidance in the CICA Handbook Section 3475, "Disposal of long-lived assets and discontinued operations" in classifying certain of its operations as held for sale and discontinued operations. Assets classified as held for sale other than long-lived assets were reviewed for impairment in accordance with their specific CICA Handbook Sections. Long-lived assets were then recorded at the lower of carrying amount or fair value less cost to sell. 2. SALE OF HEADSET ASSETS On August 24, 2007, the Company sold its Consumer Headset product line to Cellpoint Connect AB (Cellpoint) in exchange for $2,002 in shares of Cellpoint (see note 5) and a $300 promissory note, due September 30, 2008. The promissory note was discounted to $288 using the effective interest method, resulting in interest income of $12 that will be recognized as income from continuing operations over the term of the note (see note 6). The Company is also entitled to performance-based payments of up to $1,000 payable on or before March 15, 2009. The Company agreed to extend a loan to Cellpoint in two separate advances of $650, the second advance conditional upon the repurchase of Cellpoint shares by Cellpoint which have at least a value of $500 by November 24, 2007; an additional repurchase of Cellpoint shares by Cellpoint which have at least a value of $500 is required by February 24, 2008. The advances are non-revolving and interest bearing at 5%, compounded daily; the advances are due on the first anniversary of the second advancement, provided however, if the second advancement condition is not met, the due date would be November 6, 2007. The sale of the Consumer Headset product line resulted in a loss of $335, net of legal costs, and was part of the Company's Audio & Wireless business unit. The loss was calculated as follows: Accounts receivable 481 Inventories 1,895 Capital assets, net 150 Legal expenses 193 Accounts payable and accrued liabilities (94) ------------------------------------------------------------------------- 2,625 ------------------------------------------------------------------------- Promissory note 288 Cellpoint shares 2,002 ------------------------------------------------------------------------- 2,290 ------------------------------------------------------------------------- Loss on sale 335 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The assets and liabilities related to the Company's Consumer Headset product line have been classified as assets held for sale and discontinued operations in accordance with the CICA Handbook Section 3475 - Disposal of Long-Lived Assets and Discontinued Operations. The Consumer Headset product line assets included in assets held for sale are as follows: August November 31, 2007 30, 2006 ------------------------------------------------------------------------- Accounts receivable - 647 Inventories - 3,519 ------------------------------------------------------------------------- - 4,166 Capital assets, net - 253 ------------------------------------------------------------------------- - 4,419 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities - 298 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Discontinued operations related to the Consumer Headset product line include: Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue 571 512 1,271 1,819 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Loss from headset operations, before tax 113 1,002 4,225 3,030 Loss on disposal of the headset product line 335 - 335 - ------------------------------------------------------------------------- Loss from discontinued operations, before tax 448 1,002 4,560 3,030 Income tax recovery 153 342 1,556 1,034 ------------------------------------------------------------------------- Loss from discontinued operations 295 660 3,004 1,996 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The year to date loss from the headset business includes the provision on older headset products of $2,370 taken in the second quarter. 3. SALE OF HEARING INSTRUMENT AND MANUFACTURING OPERATIONS The assets and liabilities related to the Company's Hearing Instrument Operations have been classified as assets held for sale and discontinued operations in accordance with the CICA Handbook Section 3475 - Disposal of Long-Lived Assets and Discontinued Operations. The Company's Manufacturing operations have been classified as assets held for sale, with the exception of the land and building, which did not meet the immediately available for sale criteria as at August 31, 2007. The land and building continue to be classified as held for use until the required severance work is completed on the property. The Hearing Instrument and Manufacturing Operations assets included in assets held for sale are as follows: August November 31, 2007 30, 2006 ------------------------------------------------------------------------- Accounts receivable 2,948 6,648 Inventory 6,400 13,747 Prepaid expenses and other assets 373 299 Loan receivable 189 422 ------------------------------------------------------------------------- 9,910 21,116 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital assets, net 552 1,901 Intangible assets, net 16 53 ------------------------------------------------------------------------- 568 1,954 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities 2,594 2,658 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The loan receivable is due in weekly installments of US $5, accruing interest at 7% and maturing in June 2008. Discontinued operations, net of tax, related to Hearing Instruments include: Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue 5,706 9,777 18,670 26,495 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Profit (loss) from Hearing Instruments, before tax (413) 4,140 (1,394) 6,980 Loss on disposal of Hearing Instruments, before tax (7,063) - (7,063) - ------------------------------------------------------------------------- (7,476) 4,140 (8,457) 6,980 Income tax expense (recovery) (2,518) 1,419 (2,788) 2,389 ------------------------------------------------------------------------- Profit (loss) from discontinued operations (4,958) 2,721 (5,669) 4,591 ------------------------------------------------------------------------- ------------------------------------------------------------------------- On September 8, 2007, the Company entered into a definitive agreement to sell the Hearing Instrument and Manufacturing Operations. Anticipated proceeds from the sale are approximately $14,000 in cash and the transaction is expected to close in the fourth quarter. In accordance with Canadian GAAP, the assets included in the sale, other than long- lived assets, were reviewed for impairment in accordance with their respective CICA Handbook sections. As a result, a provision of $4,560 on inventory and an allowance for doubtful accounts of $1,163 on accounts receivable related to the sale were recorded as a loss under discontinued operations in the period. In addition, legal and advisory fees of $1,340 related to the sale were accrued. Long-lived assets related to the sale were reviewed to ensure they were recorded at the lower of carrying amount or fair value less cost to sell. 4. CAPITAL ASSETS, NET August November 31, 2007 30, 2006 ------------------------------------------------------------------------- Land 2,823 2,823 Buildings 12,677 22,236 Equipment and furniture 12,785 15,623 Computer software and hardware 1,775 384 ------------------------------------------------------------------------- 30,060 41,066 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 their 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 $6,179. These long-lived assets are reported in the Audio & Wireless, Video and Datacom segments as the assets support all of the segments. The carrying value of the land and building of $5,627 (November 30, 2006 - $14,590) associated with the sale of Hearing Instrument and Manufacturing Operations are classified as held for use as they were not immediately available for sale as at August 31, 2007 due to the on-going severance activities of the land and building. However, the severance activities are expected to be completed in the fourth quarter (see note 3). The carrying value of capital assets of $552 (November 30, 2006 - $2,155) associated with the sale of the Consumer Headset product line and the hearing instrument business and manufacturing operations, with the exception of land and building, have been reclassified to assets held for sale (notes 2 and 3). 5. INSTRUMENTS HELD FOR TRADING AND LONG-TERM INVESTMENTS In November 2005, the Company received a 6% interest, or $3,217 in shares of 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 $2,006 as at August 31, 2007. Under the new accounting 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, and a further unrealized loss of $546 recorded to other comprehensive income in the third quarter and $484 in the first nine months of 2007. On August 24, 2007, the Company received a 9% interest, or $2,002 in shares of Cellpoint (2.3 million shares), as consideration for the sale of its Consumer Headset product line (see note 2). The agreement with Cellpoint requires them to repurchase $1,000 of the shares (based on the price at which the shares were issued) in two installments within the next six months. The shares of Cellpoint are traded on the AktieTorget stock exchange in Sweden and have a market value of $1,724 as at August 31, 2007 (based on a combination of the trading price at August 31, the price at which the shares were issued and the impact of currency fluctuations). Under the new accounting standards, half of this investment has been classified as available-for-sale and is therefore recorded on the balance sheet at its fair value with the unrealized loss of $253 recorded to other comprehensive income for the quarter. The other half of this investment has been classified as held-for-trading and is therefore recorded on the balance sheet at its fair value with the unrealized loss of $23 recorded to the statement of earnings. 6. LONG-TERM LOAN AND PROMISSORY NOTE During the quarter the Company sold its Consumer Headset product line to Cellpoint Connect AB (see note 2). The proceeds included a $300 non- interest bearing promissory note, due September 30, 2008. The promissory note has been discounted to $288 using the effective interest method, resulting in interest income of $12 that will be recognized as income from continuing operations over the term of the note. In addition, the Company extended a $650 loan to Cellpoint, bearing interest at 5%, compounded daily. The loan is due on the first anniversary of the second advancement of $650, which is expected to take place in the fourth quarter. 7. INTANGIBLE ASSETS August November 31, 2007 30, 2006 ------------------------------------------------------------------------- Licence fees 4,208 3,880 Technology intangibles 2,221 2,221 ------------------------------------------------------------------------- 6,429 6,101 Less accumulated amortization (4,439) (3,788) ------------------------------------------------------------------------- 1,990 2,313 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 third quarter of 2007 (Q3 2006 - nil). In the nine months of 2007 no intangible assets have been written off and impairments of $79 were written off to date in 2006. The carrying value of intangible assets of $16 (November 30, 2006 - $53) associated with the sale of Hearing Instrument and Manufacturing Opera tions have been reclassified to assets held for sale (note 3). 8. CAPITAL STOCK The issued common shares of the Company as at August 31, 2007 consist of 35,775,086 common shares (November 30, 2006 - 35,784,636) at a stated value of $11,288 (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 August 31, 2007 is 2,035,765, of which 556,563 are exercisable. In the third quarter of 2007, 50,000 options were granted (year to date - 770,000), none were exercised (year to date - 25,650) and 2,375 were forfeited or relinquished (year to date - 137,550). Reconciliation of Shares outstanding No. of shares Stated Value ------------------------------------------------------------------------- Number of shares outstanding, November 30, 2006 35,784,636 11,001 Stock options exercised - Q1 & Q2 25,650 299 ------------------------------------------------------------------------- Number of shares outstanding, May 31, 2007 35,810,286 11,300 Stock options exercised - Q3 - - Shares repurchased under the normal course issuer bid (35,200) (12) ------------------------------------------------------------------------- Number of shares outstanding, August 31, 2007 35,775,086 11,288 ------------------------------------------------------------------------- ------------------------------------------------------------------------- On June 28, 2007, the Company announced a normal course issuer bid to acquire for cancellation up to 3,458,782 of its common shares (approximately 10% of the public float). The bid commenced on July 3, 2007 and will expire on July 2, 2008. Under this bid, the Company repurchased 35,200 common shares for approximately $386 in the third quarter. The June 28, 2007 bid replaces the Company's previous normal course issuer bid, which expired on June 29, 2007. Under that bid, the Company purchased a total of 212,300 of its common shares. The net excess of the repurchase price over the issue price is allocated to retained earnings. 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 1,236,273 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 770,000 12.80 774,527 10.79 Forfeited (137,550) 12.49 (23,625) 13.23 Exercised (25,650) 11.62 (134,650) 12.44 ------------------------------------------------------------------------- Outstanding, end of third quarter 2,035,765 11.93 1,428,965 11.53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options exercisable at August 31, 2007 556,563 12.47 651,938 12.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes information about options outstanding at August 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 - $12.00 923,563 4.5 years 10.56 318,563 11.63 ------------------------------------------------------------------------- $12.01 - $14.25 1,076,202 5.3 years 12.99 202,000 13.15 ------------------------------------------------------------------------- $14.26 - $16.50 36,000 0.6 years 15.54 36,000 15.54 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated weighted average fair value of stock options granted during the nine months ended August 31, 2007 was $4.10 per share using the Black- Scholes option-pricing model with the following weighted average assumptions: ------------------------------------------------------------------------- Risk-free interest rate 4.14% Expected dividend yield 1.09% Expected volatility 30.5% 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 $2,598. 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 Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Net earnings from continuing operations 3,664 4,260 4,345 11,893 Net earnings (loss) from discontinued operations (5,253) 2,061 (8,673) 2,595 ------------------------------------------------------------------------- Net earnings (loss) (1,589) 6,321 (4,328) 14,488 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average shares outstanding 35,792 35,885 35,797 35,929 Effect of dilutive stock options - - 21 80 ------------------------------------------------------------------------- Diluted weighted average shares outstanding 35,792 35,885 35,818 36,009 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share from continuing operations - basic and diluted 0.10 0.12 0.12 0.33 Earnings per share from discontinued operations - basic and diluted (0.14) 0.06 (0.24) 0.07 ------------------------------------------------------------------------- Earnings per share - basic and diluted (0.04) 0.18 (0.12) 0.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options to purchase 1,182,702 common shares were not included in the computation of diluted earnings per share for the nine months ended August 31, 2007 because the option exercise prices and unamortized compensation costs were greater than the average market price of the common shares. 9. ACCUMULATED OTHER COMPREHENSIVE LOSS ------------------------------------------------------------------------- Gains Unrealized loss (loss) on on translating Unrealized derivative financial gain (loss) instruments statements of on available designated self-sustaining for sale 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) Changes incurred during the quarter (391) 361 (799) (829) ------------------------------------------------------------------------- Balance, as at August 31, 2007 470 (3,732) (1,464) (4,726) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. 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 $12,600 and yen 1,030,000 as at August 31, 2007. These contracts mature at the latest on June 24, 2008 at exchange rates varying between Canadian $1.0470 and Canadian $1.1545 against the US dollar, and between Canadian $0.00906 and Canadian $0.00993 against the Japanese yen. Management estimates that a gain of $701 would be realized if the contracts were terminated on August 31, 2007. In accordance with the new accounting standards, these forward contracts are designated as cash flow hedges and therefore this gain has been included in other comprehensive income, net of a future income tax asset of $231. 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 August 31, 2007, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized gains on foreign exchange forward and spot contracts were $531 during the quarter (2006 - gains of $479) and gains of $200 for the year to date (2006 - gain of $2,480). In addition, there were translation losses of $242 during the quarter (2006 - gains of $337) and $1,125 for the year to date (2006- losses of $1,189). 11. 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): In accordance with Canadian GAAP, certain Audio & Wireless operations have been classified as discontinued operations. Continuing operations include development and marketing related to the FALCON product line and the development of Barium Strontium Titanate (BST) related products. Discontinued operations include 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. Also included in discontinued operations are 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 from continuing operations 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 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, instruments held for trading, loan receivable, promissory note receivable, long-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 August 31, 2007 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 22,248 367 5,954 - 28,569 Segment earnings (losses) from continuing operations 6,497 (1,694) 820 583 6,206 Losses from discontinued operations, net of tax - (5,253) - - (5,253) Depreciation and amortization 708 249 407 - 1,364 Corporate allocations 2,423 993 661 - 4,077 Capital asset additions 700 138 108 946 ------------------------------------------------------------------------- Quarter Ended August 31, 2006 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 22,378 597 5,455 - 28,430 Segment earnings (losses) from continuing operations 6,863 (2,121) 836 1,103 6,681 Earnings from discontinued operations, net of tax - 2,061 - - 2,061 Depreciation and amortization 1,124 409 544 - 2,077 Corporate allocations 2,039 1,018 438 - 3,495 Capital asset additions 1,045 294 225 - 1,564 ------------------------------------------------------------------------- Nine Months Ended August 31, 2007 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 66,908 1,061 17,488 - 85,457 Segment earnings (losses) from continuing operations 17,560 (12,464) 2,265 304 7,665 Losses from discontinued operations, net of tax - (8,673) - - (8,673) Depreciation and amortization 2,801 903 1,206 - 4,910 Asset impairment (2,987) (6,531) (77) - (9,595) Corporate allocations 7,030 2,873 1,878 - 11,781 Capital asset additions 1,463 622 952 3,037 Total assets 42,789 26,495 12,782 71,110 153,176 ------------------------------------------------------------------------- Nine Months Ended August 31, 2006 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 68,497 1,222 12,297 - 82,016 Segment earnings (losses) from continuing operations 23,108 (6,877) (585) 2,011 17,657 Earnings from discontinued operations, net of tax - 2,595 - - 2,595 Depreciation and amortization 3,712 1,185 1,643 - 6,540 Corporate allocations 6,299 3,088 1,328 - 10,715 Capital asset additions 2,520 557 799 - 3,876 Total assets 44,430 53,859 10,971 54,935 164,195 ------------------------------------------------------------------------- Revenue by principal markets is as follows: Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- United States 9,107 11,272 30,828 28,886 Europe 2,798 3,785 9,847 12,241 Pacific Rim 10,977 8,315 29,212 26,332 Canada 5,687 5,058 15,570 14,557 ------------------------------------------------------------------------- 28,569 28,430 85,457 82,016 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue is attributable to countries based upon the location of customers. Assets per country are as follows: August November 31, 2007 30, 2006 ------------------------------------------------------------------------- Canada 136,492 154,138 UK 5,578 5,834 Japan 11,106 10,460 ------------------------------------------------------------------------- 153,176 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. OTHER INCOME (EXPENSE) Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Realized gains (losses) on foreign exchange contracts (note 10) 531 479 200 2,480 Unrealized foreign exchange gains on other contracts (34) - 88 - Foreign exchange (losses) on translation (note 10) (242) 337 (1,125) (1,189) ------------------------------------------------------------------------- Gain (loss) on foreign exchange 255 816 (837) 1,291 Other expense (111) (125) (201) (335) ------------------------------------------------------------------------- 144 691 (1,038) 956 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 13. INCOME TAXES The following is a reconciliation of the expected income tax expense obtained by applying the combined Canadian corporate tax rates to earnings from continuing operations before income taxes: Three Months Ended Nine Months Ended August 31 August 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Expected income tax from continuing operations using statutory tax rates 2,117 2,280 2,615 6,025 Adjustment to future income taxes - Provincial benefit on ITCs - - - (156) Permanent differences 139 53 300 53 Adjustment to final prior year tax liability (69) - (69) (283) Different income tax rates on earnings of foreign subsidiaries 42 18 112 (23) Changes in tax rates and other 313 70 362 148 ------------------------------------------------------------------------- 2,542 2,421 3,320 5,764 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. COMMITMENTS AND CONTINGENCIES The Company is committed to future minimum lease payments under operating leases for software design tools and buildings as at August 31, 2007 as follows: ------------------------------------------------------------------------- Design Tools Buildings Total ------------------------------------------------------------------------- 2007 535 173 708 2008 2,754 793 3,547 2009 3,229 705 3,934 2010 2,615 533 3,148 2011+ - 2,385 2,385 ------------------------------------------------------------------------- 9,133 4,589 13,722 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has committed to approximately $17.0 million in purchase obligations as at August 31, 2007, of which $11.2 million is related to authorized capital projects. The remaining purchase obligations relate primarily to inventory, product development and general operating costs. The Company is also committed to license fee payments of $1.1 million over the next 3 years and other payments of $0.6 million within the next 5 years. As described in note 2, the Company has also agreed to advance an additional loan of $650 to Cellpoint in the fourth quarter as part of the sale of the headset product line agreement. 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. 15. 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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