Gennum Reports 2008 Third Quarter Results



    
    31% Quarterly Revenue Growth Drives 20% Increase in Earnings Per Share
    from Continuing Operations
    

    BURLINGTON, ON, Sept. 24 /CNW/ - Gennum Corporation (TSX: GND) today
announced its unaudited financial results for the third fiscal quarter which
ended August 31, 2008.

    
    (in millions of U.S. dollars except per share amounts)

                                                  % of                  % of
                                       2008    Revenue       2007    Revenue
                                       ----    -------       ----    -------
    Third quarter
    Revenue                            33.5                  25.5
    Gross margin                       25.6       76.3%      18.7       73.4%

    Net earnings - continuing           6.4       19.0%       5.3       21.0%
    Net earnings per share -
     continuing                     (*)0.18                  0.15

    (*) basic and diluted
    

    "Our third quarter performance underscores a consistent strengthening in
our business as we delivered a sixth consecutive quarter of growth and
improved profitability," said Dr. Franz Fink, President and CEO of Gennum. "We
continue to receive positive customer response to our new, refreshed portfolio
and this is resulting in continued healthy demand for our products. We are
successfully expanding our customer base and securing new product and IP
opportunities in Europe, Japan, Asia and North America. To maintain and build
upon our market momentum, we remain focused on balancing the investment in new
product development and core business activities with overall company
profitability to deliver further growth and shareholder value."
    Revenue of $33.5 million is up $8.0 million or 31% from $25.5 million in
the third quarter of 2007 and up 2% from $33.0 million in the second quarter
of 2008. Gross margin as a percentage of revenue remained in the industry's
top tier as lower average selling prices were offset by lower production costs
and a higher mix of IP revenue. Earnings per share from continuing operations
grew 20% from the third quarter of 2007 and 6% over the second quarter of
2008.

    New product introductions and developments

    Since the commencement of the third quarter of 2008, we introduced a
series of new products, participated in a new technology demonstration with an
industry partner, completed the acquisition of ASIC Architect, Inc. and
concluded a sale leaseback transaction involving our corporate headquarters.

    
    -   Test and Validation Equipment from Tektronix Leverages the Gennum
        3Gb/s SDI Solutions - Tektronix, Inc., a leading supplier of test,
        measurement, and monitoring instrumentation, has implemented Gennum's
        3Gb/s equalizer solutions in its award-winning WFM7120 waveform
        monitor. The advanced monitoring equipment provides customers in the
        equipment design, manufacturing and broadcast industries with 3Gb/s
        SDI test and analysis capabilities helping ensure compliance to the
        standard and propelling the 3Gb/s market forward.
    -   Gennum 3Gb/s Solutions Selected for Ensemble's Next-generation
        Broadcast Signal Generator - Ensemble Designs has selected the Gennum
        3Gb/s transmit solution for its next-generation test signal generator
        (TSG), a critical piece of equipment used to distribute test signals
        in broadcast studios. The integrated, single-chip transmit solution
        from Gennum enabled Ensemble to deliver 3G design in less than three
        months.
    -   Expanded PCI Express(R) Portfolio with New Bridge for High Data Rate
        Embedded Applications - Industry's first highly-integrated, four-lane
        PCIe bridge enables broadcast video designers to leverage the full
        potential of the PCIe standard with a low cost, turnkey solution and
        speed time-to-market by up to 80 percent.
    -   Gennum and IDT (Integrated Device Technology) Jointly Demonstrate
        High-Performance Embedded PCI Express(R) - Systems designers struggle
        to ensure signal integrity across PCIe Gen2 cables and backplanes.
        The joint demonstration by Gennum and IDT showcased the PCIe I/O
        expansion system using off the shelf components, one of the popular
        IDT PCIe Gen2 switching solutions and Gennum's advanced repeater
        solution.
    -   New ActiveConnect(TM) Products Enable Industry's Thinnest, Longest
        Reach HDMI Cables - The ActiveConnect GV8502 product is targeted at
        consumer cabling applications providing cable manufacturers with a
        cost-effective, high-quality semiconductor solution for the design of
        their thin HDMI consumer cables.
    -   ActiveConnect Adopted by Tributaries(R) for Long-Reach HDMI Extender
        - Tributaries(R) Cable, a leading supplier of high-value, high-
        performance cabling and accessories for custom home audio and home-
        theater installation, has deployed a new extender based on the
        ActiveConnect solution. Fully compatible with the latest HDMI 1.3
        standard, the Tributaries HXMini5 extender can reliably transport
        high-definition multimedia interface (HDMI) video with audio more
        than 300 feet with no loss of video or AV quality.
    -   Acquisition of ASIC Architect, Inc. Accelerates Product Development
        and Broadens IP Offering - The combination of ASIC Architect
        controller and bridge IP cores and the Snowbush Microelectronics IP
        PHY cores provides a complete high-speed interconnect solution.
        Additionally, with added controller IP and embedded system expertise,
        Gennum can more quickly deliver new, highly-integrated products to
        capitalize on high-growth consumer connectivity markets, while
        further securing market leadership in its traditional video and data
        communication segments.
    -   Completed Sale and Leaseback of Burlington, Canada Headquarters -
        Corporate headquarters sold for $13.5 million (CDN) cash to LPF
        Realty Office Inc. This transaction enables Gennum to better optimize
        its investments and fund more strategic projects that accelerate
        company growth and new product development.

    Dividend

    Gennum's Board of Directors has declared a regular cash dividend of
3.5 cents per share Canadian to be paid on October 22, 2008 to shareholders of
record on October 8, 2008. The dividend is considered an "eligible dividend"
for tax purposes.

    -------------------------------------------------------------------------
    Management will hold a conference call to discuss third quarter results
    on Wednesday, September 24, 2008 at 5:30 p.m. (ET). To access the call,
    participants should dial 1-800-732-9307. The conference call will also be
    Webcast live at www.gennum.com or www.newswire.ca/en/webcast and
    subsequently archived on the Gennum site. A rebroadcast of the call will
    be available until midnight on October 24, 2008. To access the
    rebroadcast, dial 416-640-1917 and enter the passcode 21281566 followed
    by the number sign.
    -------------------------------------------------------------------------

    About Gennum Corporation
    

    Gennum Corporation (TSX: GND) designs innovative semiconductor solutions
and intellectual property (IP) cores for the world's most advanced consumer
connectivity, enterprise, video broadcast and data communications products.
Leveraging the company's proven optical, analog and mixed-signal products and
IP, Gennum enables multimedia and data communications products to send and
receive information without compromising the signal integrity. Recognized as
an award winner for advances in high definition (HD) broadcasting, Gennum is
headquartered in Burlington, Canada, and has global design, research and
development and sales offices in Canada, Mexico, Japan, Korea, Germany, United
States, Taiwan, India and the United Kingdom. www.gennum.com

    Caution Regarding Forward-Looking Information

    This document contains statements which constitute forward-looking
statements. These forward-looking statements are not descriptive of historical
matters and may refer to management's expectations or plans. These statements
include but are not limited to statements concerning: Gennum's business
objectives and plans including Gennum's corporate strategy and strategic
priorities; Gennum's future financial performance and prospects including
revenues, gross margins and earnings; future trends in the semiconductor and
intellectual property licensing industries and, in particular, market trends
for analog and mixed signal products, optical products and intellectual
property products and licensing; Gennum's expectations for sales and licensing
of its products in these markets including anticipated costs, sales, size,
duration, growth or decline of market opportunities and competitive and
pricing pressures in these markets; Gennum's product roadmap and the speed at
which Gennum is able to introduce new products; the adoption of new standards
in the markets in which Gennum competes and the ability of Gennum to
anticipate these changes and successfully address new opportunities; sales and
capital spending plans and estimates, shipment levels and operating expenses;
exchange rate fluctuations in, and the relative values of, the Canadian
dollar, the U.S. dollar and the Japanese yen; Gennum's ability to finance its
growth plans and make necessary investment; and litigation in which Gennum is
involved.
    Inherent in forward-looking statements are risks and uncertainties beyond
Gennum's ability to predict or control including but not limited to risks
associated with: competitive and pricing pressures in the increasingly
competitive environment in which Gennum operates; economic cycles in the
semiconductor industry including downturns which can result from adverse
general economic conditions; our ability to anticipate needs for future
products and successfully execute our product roadmap; including the
possibility of the emergence of disruptive technologies which negatively
impact our positioning in the marketplace; fluctuations in foreign exchange
rates and their potential adverse impact upon our financial results; our
reliance on external foundries and suppliers and the potential adverse effects
of disruptions in any of these arrangements; the successful integration of
acquisitions; our ability to attract and retain key personnel necessary for
our business; our ability to successfully protect our intellectual property
rights; and the initiation and outcome of legal proceedings. Readers should
also refer to the sections entitled "Risks and Uncertainties" in our 2007
annual report and "Risk Factors" in our annual information form dated February
13, 2008.
    Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements
contained in this document. Such statements are based on a number of
assumptions which may prove to be incorrect including but not limited to the
following assumptions: there is no material deterioration in the business and
economic conditions in the marketplace for Gennum's products; Gennum's
expectations regarding market trends for analog and mixed signal products,
optical products and intellectual property products and licensing are not
materially incorrect; Gennum's is able to execute its product roadmap without
delays or disruptions having a material impact on Gennum; Gennum's
expectations relating to the needs and direction of the marketplace for its
products are within reasonable bounds of accuracy and Gennum is able to
introduce products and capitalize on new opportunities generally as expected;
material disruptions in the manufacture and supply of products and services to
Gennum by foundries and suppliers will not materialize; Gennum's expectations
relating to competitive pressures, including pricing pressures, are not
materially incorrect; significant fluctuations in foreign exchange rates which
materially adversely affect Gennum's financial results do not arise; customer
demand for Gennum's products remains generally as anticipated; Gennum is able
successfully integrate acquisitions; and Gennum is able to continue to retain
and attract technical and other key employees.
    Readers are cautioned that the foregoing list of important factors and
assumptions is not exhaustive. Forward-looking statements are not guarantees
of future performance. Events or circumstances could cause Gennum's actual
results to differ materially from those estimated or projected and expressed
in, or implied by, these forward-looking statements. Consequently, readers
should not place any undue reliance on these forward-looking statements.
Forward-looking statements are provided for the purpose of providing
information about management's current expectations and plans relating to the
future. Readers are cautioned that such information may not be appropriate for
other purposes. 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 or the foregoing list of factors,
whether as a result of new information, future events or otherwise, except to
the extent required by law.
    All financial results referenced are unaudited, in United States currency
and, unless otherwise indicated, are determined in accordance with Canadian
Generally Accepted Accounting Principles (GAAP).

    
    2008 THIRD QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS
    All amounts are in U.S. dollars, unless otherwise stated

    Caution regarding forward-looking statements
    

    This document contains statements which constitute forward-looking
statements. These forward-looking statements are not descriptive of historical
matters and may refer to management's expectations or plans. These statements
include but are not limited to statements concerning: Gennum's business
objectives and plans including Gennum's corporate strategy and strategic
priorities; Gennum's future financial performance and prospects including
revenues, gross margins and earnings; future trends in the semiconductor and
intellectual property licensing industries and, in particular, market trends
for analog and mixed signal products, optical products and intellectual
property products and licensing; Gennum's expectations for sales and licensing
of its products in these markets including anticipated costs, sales, size,
duration, growth or decline of market opportunities and competitive and
pricing pressures in these markets; Gennum's product roadmap and the speed at
which Gennum is able to introduce new products; the adoption of new standards
in the markets in which Gennum competes and the ability of Gennum to
anticipate these changes and successfully address new opportunities; sales and
capital spending plans and estimates, shipment levels and operating expenses;
exchange rate fluctuations in, and the relative values of, the Canadian
dollar, the U.S. dollar and the Japanese yen; Gennum's ability to finance its
growth plans and make necessary investment; and litigation in which Gennum is
involved.
    Inherent in forward-looking statements are risks and uncertainties beyond
Gennum's ability to predict or control including but not limited to risks
associated with: competitive and pricing pressures in the increasingly
competitive environment in which Gennum operates; economic cycles in the
semiconductor industry including downturns which can result from adverse
general economic conditions; our ability to anticipate needs for future
products and successfully execute our product roadmap, including the
possibility of the emergence of disruptive technologies which negatively
impact our positioning in the marketplace; fluctuations in foreign exchange
rates and their potential adverse impact upon our financial results; our
reliance on external foundries and suppliers and the potential adverse effects
of disruptions in any of these arrangements; the successful integration of
acquisitions; our ability to attract and retain key personnel necessary for
our business; our ability to successfully protect our intellectual property
rights; and the initiation and outcome of legal proceedings. Readers should
also refer to the sections entitled "Risks and Uncertainties" in our 2007
annual report and "Risk Factors" in our annual information form dated February
13, 2008.
    Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements
contained in this document. Such statements are based on a number of
assumptions which may prove to be incorrect including but not limited to the
following assumptions: there is no material deterioration in the business and
economic conditions in the marketplace for Gennum's products; Gennum's
expectations regarding market trends for analog and mixed signal products,
optical products and intellectual property products and licensing are not
materially incorrect; Gennum's is able to execute its product roadmap without
delays or disruptions having a material impact on Gennum; Gennum's
expectations relating to the needs and direction of the marketplace for its
products are within reasonable bounds of accuracy and Gennum is able to
introduce products and capitalize on new opportunities generally as expected;
material disruptions in the manufacture and supply of products and services to
Gennum by foundries and suppliers will not materialize; Gennum's expectations
relating to competitive pressures, including pricing pressures, are not
materially incorrect; significant fluctuations in foreign exchange rates which
materially adversely affect Gennum's financial results do not arise; customer
demand for Gennum's products remains generally as anticipated; Gennum is able
successfully integrate acquisitions; and Gennum is able to continue to retain
and attract technical and other key employees.
    Readers are cautioned that the foregoing list of important factors and
assumptions is not exhaustive. Forward-looking statements are not guarantees
of future performance. Events or circumstances could cause Gennum's actual
results to differ materially from those estimated or projected and expressed
in, or implied by, these forward-looking statements. Consequently, readers
should not place any undue reliance on these forward-looking statements.
Forward-looking statements are provided for the purpose of providing
information about management's current expectations and plans relating to the
future. Readers are cautioned that such information may not be appropriate for
other purposes. 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 or the foregoing list of factors,
whether as a result of new information, future events or otherwise, except to
the extent required by law.

    The following discussion and analysis is intended to provide readers with
an assessment of our performance for the third quarter of 2008 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 first and second quarters
of fiscal 2008 and 2007, and the fiscal 2007 and 2006 audited consolidated
financial statements and accompanying notes and MD&A contained in our 2007
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
on SEDAR 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 U.S. dollars, unless otherwise stated.

    CORPORATE OVERVIEW AND BUSINESS STRATEGY

    Today, there is an expectation by those seeking information, whether it
is data, video or multimedia content, to access it instantaneously anywhere in
the world at any time. The digitization of content puts significant demand on
high-speed audio and video streaming products. That is where our expertise
plays a critical role. At Gennum (TSX: GND), we design semiconductor solutions
and intellectual property (IP) cores for some of the world's most advanced
consumer connectivity, enterprise, video broadcast and data communications
applications. Our optical, analog and mixed-signal products and IP ensure the
highest signal integrity enabling our customers to move more information
across longer distances at faster speeds.
    Our corporate strategy is to leverage core technological capabilities
into selected, high-growth markets that provide a competitive advantage for
both the Company and our customers. Our strategic priorities for 2008 include
generating revenue growth greater than the industry average, maintaining
industry top tier gross margins and delivering healthy operating returns. To
achieve these priorities we are executing to our plan that doubles the number
of new product and IP introductions in 2008 compared to 2007, strengthens our
global team, drives increased operational efficiencies and leverages a strong
cash position to complement our existing portfolio of optical, analog and
mixed-signal and IP products.

    New product introductions and developments

    In the third quarter of 2008, we introduced a series of new products,
participated in a new technology demonstration with an industry partner,
completed the acquisition of ASIC Architect, Inc. and concluded a sale
leaseback transaction involving our corporate headquarters.

    
    -   Test and Validation Equipment from Tektronix Leverages the Gennum
        3Gb/s SDI Solutions - Tektronix, Inc., a leading supplier of test,
        measurement, and monitoring instrumentation, has implemented Gennum's
        3Gb/s equalizer solutions in its award-winning WFM7120 waveform
        monitor. The advanced monitoring equipment provides customers in the
        equipment design, manufacturing and broadcast industries with 3Gb/s
        SDI test and analysis capabilities helping ensure compliance to the
        standard and propelling the 3Gb/s market forward.
    -   Gennum 3Gb/s Solutions Selected for Ensemble's Next-generation
        Broadcast Signal Generator - Ensemble Designs has selected the Gennum
        3Gb/s transmit solution for its next-generation test signal generator
        (TSG), a critical piece of equipment used to distribute test signals
        in broadcast studios. The integrated, single-chip transmit solution
        from Gennum enabled Ensemble to deliver 3G design in less than three
        months.
    -   Expanded PCI Express(R) Portfolio with New Bridge for High Data Rate
        Embedded Applications - Industry's first highly-integrated, four-lane
        PCIe bridge enables broadcast video designers to leverage the full
        potential of the PCIe standard with a low cost, turnkey solution, and
        speed time-to-market by up to 80 percent.
    -   Gennum and IDT (Integrated Device Technology) Jointly Demonstrate
        High-Performance Embedded PCI Express(R) - Systems designers struggle
        to ensure signal integrity across PCIe Gen2 cables and backplanes.
        The joint demonstration by Gennum and IDT showcased the PCIe I/O
        expansion system using off the shelf components, one of the popular
        IDT PCIe Gen2 switching solutions and Gennum's advanced repeater
        solution.
    -   New ActiveConnect(TM) Products Enable Industry's Thinnest, Longest
        Reach HDMI Cables - The ActiveConnect GV8502 product is targeted at
        consumer cabling applications providing cable manufacturers with a
        cost-effective, high-quality semiconductor solution for the design of
        their thin HDMI consumer cables.
    -   ActiveConnect Adopted by Tributaries(R) for Long-Reach HDMI Extender
        - Tributaries(R) Cable, a leading supplier of high-value, high-
        performance cabling and accessories for custom home audio and home-
        theater installation, has deployed a new extender based on the
        ActiveConnect solution. Fully compatible with the latest HDMI 1.3
        standard, the Tributaries HXMini5 extender can reliably transport
        high-definition multimedia interface (HDMI) video with audio more
        than 300 feet with no loss of video or AV quality.
    -   Acquisition of ASIC Architect, Inc. Accelerates Product Development
        and Broadens IP Offering - The combination of ASIC Architect
        controller and bridge IP cores and the Snowbush Microelectronics IP
        PHY cores provides a complete high-speed interconnect solution.
        Additionally, with added controller IP and embedded system expertise,
        Gennum can more quickly deliver new, highly-integrated products to
        capitalize on high-growth consumer connectivity markets, while
        further securing market leadership in its traditional video and data
        communication segments.
    -   Completed Sale and Leaseback of Burlington, Canada Headquarters -
        Corporate headquarters sold for $13.5 million (CDN) cash to LPF
        Realty Office Inc. This transaction enables Gennum to better optimize
        its investments and fund more strategic projects that accelerate
        company growth and new product development.

    RESULTS FROM OPERATIONS
    (in millions of U.S. dollars, except earnings per share)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Revenue           33.5      25.5      31.4      96.6      71.9      34.3
    Gross margin      25.6      18.7      36.7      73.3      54.9      33.6
    Earnings from
     continuing
     operations
     before income
     taxes             9.4       8.8       7.4      26.1      25.3       3.3
    As a % of
     revenue          28.1      34.4                27.1      35.2

    Net earnings
     before
     discontinued
     operations        6.4       5.3      19.2      16.9      15.9       6.0
    Net earnings
     (loss) from
     discontinued
     operations          -      (6.8)      n/a       7.6     (19.9)      n/a
    Net earnings
     (loss)            6.4      (1.5)      n/a      24.5      (3.9)      n/a

    Earnings (loss)
     per share:
      Continuing
       operations     0.18      0.15      20.0      0.48      0.45       6.7
      Discontinued
       operations     0.00     (0.19)      n/a      0.21     (0.55)      n/a
    Net earnings
     (loss) per
     share(*)         0.18     (0.04)      n/a      0.69     (0.10)      n/a

    Cash & cash
     equivalents      55.1   (1)34.1      61.5      55.1   (1)34.1      61.5
    -------------------------------------------------------------------------
    (*) basic and diluted
    (1) as of November 30, 2007

    Fully diluted earnings per share from continuing operations grew 20%
compared to the third quarter of 2007, driven by strong revenue growth and
gross margins.

    Revenue
    (in millions of U.S. dollars)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Analog and
     Mixed Signal     26.7      22.8      17.1      75.4      64.3      17.1
    Optical            3.5       2.7      31.0      12.8       7.6      68.9
    IP Licensing       3.3         -       n/a       8.4         -       n/a
    -------------------------------------------------------------------------
    Total Revenue     33.5      25.5      31.4      96.6      71.9      34.3
    -------------------------------------------------------------------------
    

    Total revenue for the third quarter of 2008 increased by more than 31%
compared to the same period in 2007. For the first nine months of the year,
revenue increased by more than 34%, as a result of higher revenue in each of
the Analog and Mixed Signal (AMS) and Optical product groups and revenue
generated from the acquisition of Snowbush Microelectronics. Compared to the
second quarter of 2008, total revenue grew about 2%. This represents the sixth
consecutive quarter of sequential revenue growth for the continuing business.
    We believe that expansion of our global sales force combined with new
product introductions has enabled us to grow in all major geographic regions
on a year-over-year basis as revenue in North America, Europe and the Pacific
Rim grew by 35%, 40% and 22%, respectively.

    Analog & Mixed Signal (AMS) products

    Revenue generated from our AMS product group rose 17% to $26.7 million in
the third quarter of 2008 compared to the same quarter in the prior year.
    Global AMS products revenue from high-definition (HD) products increased
by 15% compared to the same quarter in 2007, partly attributable to the
continued ramp of our 3 Gigabit per second products. Geographically, total AMS
revenue grew by 13%, 39% and 10% in North America, Europe and Japan,
respectively, compared to the third quarter of 2007.
    On a global basis, sales for standard-definition (SD) products increased
slightly in the third quarter of 2008 compared to the same quarter in 2007.
Sales are expected to decline over the longer term as studios continue to
focus on upgrading their equipment to support HD and multi-standard
capabilities. Sales of SD products declined from 18% to 15% of total AMS
products revenue in the third quarter of 2008 compared to the same period in
2007.
    Clock and data recovery (CDR) sales have generated a 61% increase in
revenue compared to the third quarter of 2007 as the market for the XFP
optical transceiver continues to grow.
    AMS products revenue represented 80% of the total consolidated revenue in
the third quarter of 2008 (2007 - 89%). Revenue generated from the HD-SDI
(serial digital interface) market represented 64% of the total AMS products
revenue in the third quarter of 2008 (2007 - 65%).
    On a year-to-date basis, AMS revenue has increased 17% over the prior
year. Revenue from HD products is up 19%, while revenue from SD products
declined about 10%. Revenue from CDR products is up 70% over the same period
in 2007.

    Optical products

    Revenue generated from the Optical product group was $3.5 million in the
third quarter of 2008 compared to $2.7 million in the same quarter in 2007, an
increase of 31%. Revenue from optical products fell 14% compared to the second
quarter of 2008 due to the completion of a customer project which augmented
shipments in the last quarter of 2007 and the first half of 2008. This project
leveraged the new SFP+ form factor which has not been broadly deployed yet to
the global market, but is expected to gain deeper market traction in 2009.
Excluding this special project, the optical products group achieved another
quarter of growth and through our early work with lead customers on SFP+ we
are well positioned to capitalize on the future growth potential of this
technology.
    Optical products revenue represented 10% of the total consolidated
revenue in the third quarter of 2008 (2007 - 10%). On a year-to-date basis,
Optical products revenue increased 69% over the prior year.
    The optical component semiconductor supplier environment is experiencing
increased competitive pressures, but Gennum continues to see market demand for
its TIA, ROSA, and limiting amplifier products.

    IP licensing

    IP licensing is mainly attributable to revenue associated with the
acquisition of Snowbush Microelectronics in October 2007. Revenue of
$3.3 million in the third quarter of 2008 represented an increase of 14% from
revenue of $2.8 million in the second quarter of 2008. IP revenue is on track
to exceed our previously stated expectations of $10 million for 2008, assuming
no significant change in the competitive landscape or the related economic
environment.

    
    Gross margin
    (in millions of U.S. dollars)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Gross margin      25.6      18.7      36.7      73.3      54.9      33.6
    Percentage of
     revenue          76.3      73.4                75.9      76.3
    -------------------------------------------------------------------------
    

    Gross margin as a percentage of revenue in the third quarter of 2008 was
76.3%, compared to the 2007 third quarter gross margin of 73.4%. For the first
nine months of the year, gross margin as a percentage of revenue was 75.9%
compared to 76.3% in 2007. We continue to remain in the industry's top tier
for gross margin percentage. The cost reduction programs we have in place and
an increased mix of IP licensing revenue are expected to help maintain our
gross margins and offset market price pressures.

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

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Sales,
     marketing and
     administration
     expense           9.5       5.7      67.1      26.3      16.9      56.1
    Percentage of
     revenue          28.2      22.2                27.3      23.5
    -------------------------------------------------------------------------
    

    Sales, marketing and administration expenditures for the third quarter of
2008 increased by 67.1% compared to the third quarter of 2007. The
$3.8 million increase was caused by higher accruals for variable compensation
of approximately $1.5 million, the acquisition of Snowbush Microelectronics of
$0.3 million and $0.5 million related to the translation of Canadian dollars
to U.S. dollars, our reporting currency. The remaining increase represents
investments in fundamental activities such as broadening our sales presence,
accelerating new product introductions and building capabilities in corporate
business development, offset by savings in other areas. The figure for the
third quarter of 2008 represents a $0.8 million increase from the second
quarter of 2008, mainly due to higher accruals for variable compensation.
    On a year-to-date basis, sales, marketing and administration expenditures
are up $9.4 million or approximately 56%. The $9.4 million increase was caused
by higher accruals for variable and sales compensation of approximately
$2.3 million, the acquisition of Snowbush Microelectronics of $0.9 million and
$2.7 million related to the translation of Canadian dollars to U.S. dollars.
Targeted investments in the development of a broader global sales presence,
corporate branding and product collaterals account for the rest of the
increase.

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

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    R&D expense
     (gross)           9.4       5.7      64.6      27.4      15.8      73.3
    Percentage of
     revenue          28.1      22.4                28.4      22.0
    -------------------------------------------------------------------------
    

    R&D spending in the third quarter of 2008 was higher compared to the same
period in 2007 as we increased our focus around a core portfolio of optical,
analog and mixed-signal solutions and increased the R&D spending on new
product development. Of the 64.6% increase in R&D expenses, the acquisition of
Snowbush Microelectronics, which occurred in October 2007, added $2.3 million
to our gross R&D expenditures for the third quarter of 2008 compared to the
third quarter of 2007, which reflected no Snowbush Microelectronics
expenditures. Higher accruals for variable compensation of approximately
$1.3 million compared to the same period last year also contributed to the
increase in R&D expenditures and $0.6 million is related to the translation of
Canadian dollars to U.S. dollars. During the period, $1.3 million of
development cost was capitalized to intangible assets.
    In the first nine months of 2008, R&D spending has increased
$11.6 million or 73.3%. Of the increase, $6.4 million relates to the
acquisition of Snowbush Microelectronics, approximately $1.3 million relates
to higher variable compensation accruals, $2.5 million relates to the impact
of a stronger Canadian currency and the remainder represents the investment
required to support a significant increase in new product introductions in
2008 versus 2007. Year to date, $2.1 million of development costs were
capitalized to intangible assets.

    
    Amortization of intangible assets
    (in millions of U.S. dollars)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Amortization
     expense           0.5       0.1       n/a       1.3       0.2       n/a
    Percentage of
     revenue           1.4       0.3                 1.4       0.3
    -------------------------------------------------------------------------

    Amortization expenses in the third quarter and for the first nine months
of 2008 were higher compared to the same periods in 2007 mainly due to the
amortization of intangible assets that were acquired through the Snowbush
Microelectronics acquisition in the fourth quarter of 2007.

    Other income (expense)
    (in millions of U.S. dollars)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Other income
     (expense)         1.7       0.1       n/a       2.7      (0.7)      n/a
    Percentage of
     revenue           5.0       0.6                 2.8       n/a
    -------------------------------------------------------------------------
    

    Other income in the third quarter of 2008 was primarily related to a
$1.7 million foreign exchange gain (2007 - $0.2 million foreign exchange
gain). This gain is mainly due to a $0.1 million loss on foreign exchange
contracts and a $1.8 million gain on translation (2007 - $0.5 million gain on
foreign exchange contracts and $0.2 million loss on translation). For the
first nine months of the year, other income was primarily related to a
$2.9 million foreign exchange gain (2007 - $0.5 million foreign exchange
loss). The gain is primarily due to a $0.7 million gain on foreign exchange
contracts and a $2.2 million gain on translation (2007 - $0.1 million loss on
foreign exchange contracts and a $0.6 million loss on translation).

    
    Income taxes
    (in millions of U.S. dollars)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Income taxes       3.0       3.4     (11.1)      9.3       9.4      (1.2)
    -------------------------------------------------------------------------
    

    Income taxes for the third quarter of 2008 represented 32.3% of earnings
from continuing operations before taxes, compared to 39.0% for the same period
in 2007. The reduced percentage in 2008 was mainly due to a tax refund
received by our United Kingdom subsidiary and lower statutory tax rates in
Canada and the United Kingdom. For the first nine months of the year, income
taxes were 35.4% of earnings from continuing operations before taxes, compared
to 37.0% for the same period in 2007. The effective tax rate in the first nine
months of 2008 was above the statutory tax rate of 33.5% due primarily to the
reduction in the Canadian federal corporate income tax rate for the calendar
year 2008 from 20.5% to 19.5%, which resulted in a reduction in net future
income tax assets and an increase in income tax expense.

    
    Net earnings from continuing operations
    (in millions of U.S. dollars, except earnings per share)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Net earnings
     from continuing
     operations        6.4       5.3      19.2      16.9      15.9       6.0
    Net earnings
     from continuing
     operations as
     % of revenue     19.0      21.0                17.5      22.2

    Basic earnings
     per share from
     continuing
     operations       0.18      0.15      20.0      0.48      0.45       6.7
    -------------------------------------------------------------------------

    In the third quarter of 2008, net earnings from continuing operations was
$6.4 million or $0.18 per share compared with $5.3 million or $0.15 per share
in the third quarter of 2007. The increase in net earnings versus last year
was attributable to strong revenue growth and favourable foreign currency
translation gains.
    For the first nine months ended August 31, 2008, net earnings from
continuing operations was $16.9 million or 6% higher than the comparable
period in the prior year.


    Discontinued operations, net of tax
    (in millions of U.S. dollars, except per share data)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Falcon(TM)           -      (0.4)      n/a         -      (1.6)      n/a
    Headset              -      (0.6)      n/a         -      (3.1)      n/a
    Hearing/Mfg.         -      (4.4)      n/a      (1.1)    (10.7)      n/a
    VXP(R),
     including gain
     on sale             -      (1.4)      n/a       8.7      (4.5)      n/a
    -------------------------------------------------------------------------
    Total earnings
     (loss) on
     discontinued
     operations, net
     of taxes            -      (6.8)      n/a       7.6     (19.9)      n/a
    Basic earnings
     per share from
     discontinued
     operations          -     (0.19)      n/a      0.21     (0.55)      n/a
    -------------------------------------------------------------------------

    On February 8, 2008, the Company completed the sale of its VXP(R) Image
Processing business to Sigma Designs for $18.2 million, which resulted in a
pre-tax gain on the sale of $13.8 million. The sale also resulted in the
termination of approximately 30 employees in January 2008. The cost of
severing these employees was approximately $1.3 million and was reflected in
discontinued operations in the first quarter of 2008.
    For comparative purposes, the third quarter and year-to-date 2008 and 2007
results from operations, net of tax, for Falcon(TM), Headset, Hearing
Instrument and Manufacturing Operations and VXP(R) Image Processing have been
reclassified to discontinued operations.

    Net earnings
    (in millions of U.S. dollars except earnings per share)

                  Three Months Ended August 31   Nine Months Ended August 31
                      2008      2007  % change      2008      2007  % change
    -------------------------------------------------------------------------
    Net earnings
     (loss)            6.4      (1.5)      n/a      24.5      (3.9)      n/a
    Net earnings
     as % of
     revenue          19.0       n/a                25.4       n/a

    Net earnings
     (loss) per
     share(*)         0.18     (0.04)      n/a      0.69     (0.10)      n/a
    -------------------------------------------------------------------------
    (*) basic and diluted
    

    In the third quarter of 2008, net earnings were $6.4 million, or
$0.18 per share, compared with a net loss of $1.5 million, or $0.04 per share
in the third quarter of 2007. The loss in 2007 was mainly due to the loss on
sale of the Hearing Instrument and Manufacturing Operations. Net earnings in
the first nine months of the year were significantly higher compared to the
same period in 2007 mainly due to improved 2008 results from continuing
operations, the gain on the sale of the VXP(R) Image Processing business in
the first quarter of 2008 and losses related mainly to the Hearing and
Manufacturing operations in 2007.

    Quarterly results

    The following analysis uses the average historical Canadian to U.S.
exchange rate for each quarter to produce revenue, earnings and earnings per
share for our continuing and discontinued operations by quarter:

    
    (in millions of U.S. dollars except earnings per share)

               Third Quarter  Second Quarter   First Quarter  Fourth Quarter
                2008    2007    2008    2007    2008    2007    2007    2006
    -------------------------------------------------------------------------
    Revenue     33.5    25.5    33.0    23.6    30.1    22.8    29.9    23.5

    Net
     earnings
     from
     continuing
     operations  6.4     5.3     5.9     4.4     4.6     6.2     4.4     4.6

    Net
     earnings
     per share
     from
     continuing
     operations
     basic and
     diluted    0.18    0.15    0.17    0.12    0.13    0.17    0.12    0.13

    Net
     earnings
     (loss) per
     share on
     discontinued
     operations
     basic and
     diluted    0.00   (0.19)  (0.03)  (0.29)   0.24   (0.07)  (0.13)  (0.06)

    Net
     earnings
     (loss) per
     share
     basic and
     diluted    0.18   (0.04)   0.14  (0.17)   0.37    0.10   (0.01)   0.07
    -------------------------------------------------------------------------

    Our revenue and net earnings performance fluctuate on a quarterly basis
due to a wide variety of factors.

    Changes in reporting - supplemental information

    This is the first fiscal year that we have reported as a single segment
and using the U.S. dollar as our reporting currency. The functional currencies
of the Company have not changed. The following information is being provided
to assist in the understanding of these changes.

    i) U.S. Dollar Revenue by Product Line (in thousands)

                                              AMS  Optical       IP    Total
    -------------------------------------------------------------------------
    2006   Q1                              19,843      928        -   20,771
           Q2                              22,412    1,384        -   23,796
           Q3                              22,023    1,774        -   23,797
           Q4                              21,867    1,669        -   23,536

    2007   Q1                              20,896    1,935        -   22,831
           Q2                              20,621    2,984        -   23,605
           Q3                              22,818    2,672        -   25,490
           Q4                              24,941    4,315      654   29,910
    -------------------------------------------------------------------------

    ii) Year-Over-Year Operating Expenses by Currency
    

    The average rate of exchange for Canadian to U.S. dollar has shown
significant strengthening over the past year. The average rate has moved from
0.8919 in the first nine months of 2007 to 0.9952 in the first nine months of
2008, a change of 11.6%. While our revenue is primarily in U.S. dollars and
Japanese yen, operating expenses are primarily in the Canadian dollar local
currency. As a result, the change to U.S. dollar reporting can have a
significant impact when we report our operating expenses in U.S. dollars:

    
    (in millions of U.S. dollars)

                                            Nine Months ended
                                             August 31, 2008
                               Cdn. $     U.S. $(1)    U.S. $(2)  $ Change(3)
    -------------------------------------------------------------------------

    R&D, net                     24.5         24.4         21.9          2.5
    Sales, Marketing & Admin     26.5         26.3         23.6          2.7
    -------------------------------------------------------------------------
                                 51.0         50.7         45.5          5.2
    -------------------------------------------------------------------------
    (1) U.S. dollar equivalent using 2008 U.S. dollar exchange rates
    (2) U.S. dollar equivalent using 2007 U.S. dollar exchange rates
    (3) 2008 versus 2007 Canadian to U.S. dollar currency translation impact
    

    EBITDA

    We believe that financial analysts, current investors and potential
investors use EBITDA to understand our financial results and to compare us
with our industry peers. The term "EBITDA" refers to a non-GAAP financial
measure that we define as earnings before interest, taxes, depreciation and
amortization (related to intangible assets and stock-based compensation).
Since EBITDA is not a measure defined under GAAP, it may not be comparable to
definitions of EBITDA reported by other companies. EBITDA is presented here
over the last six quarters to provide readers with a historical perspective
regarding our operational performance. We believe this allows us to compare
our operating performance on a more consistent basis. The most comparable
Canadian GAAP financial measure is operating income from continuing
operations. The table below reconciles EBITDA to operating income (from
continuing operations) reported for the last six fiscal quarters.

    
    -------------------------------------------------------------------------
                        Q3        Q2        Q1        Q4        Q3        Q2
                      2008      2008      2008      2007      2007      2007
    -------------------------------------------------------------------------
    Revenue           33.5      33.0      30.1      29.9      25.5      23.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operating
     Income from
     Continuing
     Operations        7.5       8.6       6.5       6.8       8.2       7.8

    Adjustments to
     reconcile to
     EBITDA:
      Depreciation
       expense         1.4       1.3       1.4       1.5       1.1       1.7
      Amortization of:
        Intangibles    0.5       0.4       0.5       0.3       0.2       0.1
        Stock based
         compensation  1.0       1.0       0.7       0.6       0.5       0.4
    -------------------------------------------------------------------------
    EBITDA            10.4      11.3       9.1       9.2      10.0      10.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    EBITDA as a % of
     revenue            31%       34%       30%       31%       39%       43%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RE

SOURCES Cash and cash equivalents The cash and cash equivalents balance at August 31, 2008 was $55.1 million, an increase of $21.0 million from the end of the 2007 fiscal year and $12.0 million from the quarter. The impact of a weaker Canadian dollar reduced this figure by $3.5 million in the quarter and $3.7 million year to date. Cash provided by continuing operations of $10.2 million in the quarter represented an increase of 40% over the prior year fueled by solid earnings and improved working capital management. On a year-to-date basis, cash provided by continuing operations was $17.4 million, an increase of 300% over the prior year. Net proceeds from divestitures (VXP(R), Manufacturing and the Harvester Road land and building) of $35.9 million have more than offset our investment in a new Enterprise Resource Planning (ERP) system of $4.2 million, our new test operations of $3.0 million, the acquisition of ASIC Architect for $1.6 million and the payment of $4.1 million of deferred equity related to the acquisition of Snowbush Microelectronics. Management believes that the current balance of cash and cash equivalents, 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, 2008, the accounts receivable balance was $21.6 million, which was an increase of $0.6 million compared to the balance at the end of the 2007 fiscal year. This is excellent performance given the year-to-date increase in revenue of $24.7 million. There were no material write-offs during the quarter or for the first nine months of the year. Inventories Inventories of $15.0 million at August 31, 2008 were higher by $2.9 million compared to the end of the 2007 fiscal year. The increase was caused by a planned investment in finished goods related to legacy products approaching the end-of-life stage. Instruments held for trading and long-term investments On August 24, 2007, the Company received a 9% interest, or $1.9 million, in shares of CellPoint Connect (2.3 million shares), as partial consideration for the sale of the Company's Consumer Headset product line. The agreement with CellPoint required it to repurchase $0.9 million of the shares based on the price at which the shares were issued in two installments of $0.5 million each, translated at historical rates to U.S. dollars. The first such repurchase occurred in February 2008, and the second repurchase is expected to occur in the fourth quarter of 2008. The shares related to the second repurchase have been classified as held for trading and are recorded on the balance sheet at $0.5 million, their market price at the time of issuance translated to U.S. dollars at current rates. The portion of shares which are not designated for repurchase by CellPoint are recorded on the balance sheet at their market value of $1.0 million and are classified as available for sale under long-term investments. In the third quarter of 2008, an unrealized increase in market value of $0.1 million was recorded in Other Comprehensive Income; on a year-to-date basis, an unrealized increase of $0.5 million was recorded in Other Comprehensive Income. In November 2005, we received a 6% interest, or $2.7 million, in shares of Nanoscience Inc. (11.1 million shares) as consideration for the sale of our 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 $1.4 million as at August 31, 2008 (November 30, 2007 - $2.6 million). This investment was classified as available for sale and therefore was recorded on the balance sheet at its fair value with the decrease in the fair value in the third quarter of 2008 of $0.3 million recorded in Other Comprehensive Income; the year-to-date decrease in fair value of $1.1 million was recorded in Other Comprehensive Income. Fair value is based on the trading price of the shares and the impact on converting to U.S. dollars. Accounts payable and accrued liabilities Accounts payable and accrued liabilities at August 31, 2008 were $14.8 million, which represented a decrease of 16% or $2.9 million compared to the end of fiscal 2007. The November 30, 2007 balance excludes payables related to the liabilities held for sale. The reduction resulted primarily from the payment of $4.1 million of the deferred equity component of the Snowbush Microelectronics acquisition, the payment for a second LTX high speed tester for our prototyping operations and a one-time vacation pay out to employees in December, offset by increases in accruals for variable compensation. Total assets Total assets at August 31, 2008 were $173.6 million, an increase of $9.7 million from the 2007 year end, resulting primarily from the proceeds received on the sale of the Harvester Road land and building, the sale of the VXP(R) Image Processing business and the sale of the manufacturing land and building, partially offset by the disposal of assets held for sale and payment of the deferred equity component related to the Snowbush Microelectronics acquisition. Capital expenditures Capital additions were $11.1 million in the first nine months of 2008 compared to $2.4 million in the same period in 2007. The majority of the capital additions consisted of $4.4 million for the new ERP system, $3.2 million for the new Burlington test operations facility, and $1.2 million for several key pieces of Optical R&D equipment. Year-to-date capital additions in 2008 related to R&D items (21%), test equipment and facilities (37%), and corporate (42%). Dividends Total dividends of $1.2 million, or Cdn. $0.035 per share, were paid in the third quarter of 2008 (third quarter of 2007 - $1.1 million, or Cdn. $0.035 per share). Derivative financial instruments Effective December 1, 2007, we adopted new accounting policies that required additional disclosures on financial instruments. See below under "Changes in Significant Accounting Policies" and note 1 to the unaudited consolidated financial statements for the third quarter of 2008 for a discussion regarding these changes. At August 31, 2008, we had entered into foreign exchange forward contracts to sell an aggregate amount of U.S. $18,700 and Japanese yen 964,000. These contracts mature at the latest on August 26, 2009 at exchange rates varying between Canadian $0.9833 and Canadian $1.0484 against the U.S. dollar, and between Canadian $0.0090 and Canadian $0.00984 against the Japanese yen. Management estimates that a loss of $1,271 would be realized if the contracts were terminated on August 31, 2008. The fair values of the foreign exchange forward contracts are based on market information from major financial institutions. These forward contracts are considered cash flow hedges and therefore the loss of $850, net of future income tax assets, has been included in Other Comprehensive Income. This loss is expected to be re-classified to net income over the next twelve months as the forward contracts mature. During the third quarter and for the first nine months of the year, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized losses on foreign exchange forward and spot contracts were $0.1 million during the 2008 third quarter ( 2007 third quarter - realized gains of $0.5 million). CONTRACTUAL OBLIGATIONS (in millions of U.S. dollars) ------------------------------------------------------------------------- Payments Due by Period ---------------------- Total Less than 1 year 1-3 years 4+ years Operating leases 28.2 3.4 6.0 18.8 Purchase obligations(1) 9.9 0.2 9.7 --- License fee obligations and other 0.1 0.1 --- --- ------------------------------------------------------------------------- Total contractual obligations 38.2 3.7 15.7 18.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 $1.0 million. OTHER DEVELOPMENTS Litigation As previously disclosed, Gennum was the subject of a patent infringement claim in the United States District Court relating to a limited number of non-core Gennum products. In June 2007, the Court rendered its judgment which ruled that the Gennum devices which were the subject matter of the claim did not infringe most of the asserted claims and that the rest of the other asserted claims were not valid. The judgement was appealed by the plaintiff, and we cross-appealed. The Federal Circuit Court heard the appeal and cross appeal in May 2008, but has not yet rendered its decision. In the ordinary course of business activities, we 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 audited November 30, 2007 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 2007 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, 2007 audited consolidated financial statements, except as described below. Effective December 1, 2007, we adopted new standards under the following sections of the Canadian Institute of Chartered Accountants (CICA) Handbook: Section 3862, Financial Instruments - Disclosures; Section 3863, Financial Instruments - Presentation; and Section 1535, Capital Disclosures. The adoption of the new standards resulted in additional note disclosure requirements. For a description of the principal changes 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, 2008. The CICA released the following new accounting standards that are effective for our fiscal year commencing December 1, 2008: Section 3031, Inventories; Section 3064, Goodwill and Intangible Assets; Section 1400, General Standards of Financial Statement Presentation; and Section 1000, Financial Statement Concepts: Section 3031, Inventories will replace the existing Section 3030, Inventories. This standard provides more guidance on the measurement and disclosure requirements for inventories. We are currently evaluating the effects of these new standards. Section 1400, General Standards of Financial Statement Presentation was amended to include requirements to assess and disclose an entity's ability to continue as a going concern. Section 3064, Goodwill and Intangible Assets will replace the existing Section 3062, Goodwill and Other Intangible Assets, and results in the withdrawal of Section 3450, Research and Development Costs, and amendments to Accounting Guidelines 11, Enterprises in the Development Stage, and Section 1000, Financial Statement Concepts. This new standard clarifies that costs can be deferred only when they relate to an item that meets the definition of an asset, and as a result, start-up costs must be expensed as incurred. Section 1000, Financial Statement Concepts, was also amended to provide consistency with this new standard. We are currently evaluating the effects of these new standards. CONTROLS AND PROCEDURES There have been no changes in our internal controls over financial reporting during the third quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. COMMON SHARES OUTSTANDING At August 31, 2008, there were 35,607,186 common shares of Gennum outstanding, compared with 35,775,086 shares at November 30, 2007. On June 28, 2007, we announced a normal course issuer bid to acquire for cancellation up to 3,458,782 of our common shares (approximately 10% of the public float). The bid commenced on July 3, 2007 and expired on July 2, 2008. Under this bid, we repurchased 36,100 common shares in the first nine months of 2008 (an additional 131,800 common shares were repurchased in the fourth quarter of 2007 but not cancelled until the first quarter of 2008). The bid announced on June 28, 2007 replaced our previous normal course issuer bid, which expired on June 29, 2007. Under that bid, we purchased a total of 212,300 of our common shares. The bid announced on June 28, 2007 was not renewed by the Company. At the end of the third quarter of 2008, there were 2,229,577 outstanding options, each entitling the holder to purchase one common share of Gennum. Of these outstanding options, 563,987 were exercisable as at August 31, 2008. 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. For a discussion of these risks, please refer to our annual information form dated February 13, 2008, our 2007 annual report and our other public filings. OUTLOOK Our third quarter performance, representing a sixth consecutive quarter of growth, is reflective of another quarter in which we saw robust demand for our core portfolio of products. Looking forward to the fourth quarter, we continue to be optimistic based on the belief that our broad portfolio of high-speed mixed signal and optical products and IP is enabling us to benefit from a unique, high-growth segment within the semiconductor market. While we can not predict the precise effects of macroeconomic events on our industry, we do expect positive market trends to continue, resulting in healthy demand for our products. Our efforts to optimize operational productivity and efficiencies remain a primary focus for our team to drive continued strong operating results. We remain optimistic for our continued strength in revenue and earnings. On a product line basis, AMS products revenue in the third quarter was up approximately 17% year over year. The majority of AMS sales go into the video broadcast market. The International Association of Broadcast Manufacturers expects industry growth of about 13% in 2008 fuelled in part by the continuing build-out of global HD infrastructure. As a semiconductor supplier to this market we expect to benefit from new products introduced by our video broadcast customers and as a result believe that we are positioned to grow faster than the overall video broadcast industry in 2008. Optical products revenue in the third quarter was up about 31% year over year despite being down on a sequential basis. Ovum RHK has stated that it expects industry sales growth for optical components to be almost 14% in 2008. The semiconductor supplier environment for optical components continues to experience increased competitive pressures. However, through the fourth quarter, we expect to continue our design-win momentum specifically in the Japan, Asia Pacific and North America regions, which we believe will position us to continue to grow faster than the optical component industry. IP revenue remains on track and, assuming no significant changes in the competitive landscape or the related economic environment, we expect to exceed our previously stated 2008 expectation of $10 million in revenue. Revenue in the third quarter grew 15% sequentially. Gartner Dataquest expects the market for semiconductor IP and design services to grow about 18% in 2008. Due to the timing of the Snowbush Microelectronics IP acquisition, a normalized year-over-year comparison is not available for our IP revenue. That said, on the basis of the foregoing assumptions and with the acquisition of Snowbush Microelectronics, Inc. and ASIC Architect, Inc., we expect our IP revenue to grow on a par with industry expectations. Our near-term gross margins are expected to remain strong. Continued focus on driving operational efficiencies, growing IP revenue and increasing productivity is expected to help offset market price pressures. As we enter into the fourth quarter of 2008, we remain focused on investing in new products to drive increased design wins, defend our position in our core markets and capitalize on new opportunities in adjacent markets. We intend to continue actively managing our overall sales, marketing and administration expenditures, at the same time assuring that adequate funding is allocated to programs such as sales incentives, new product collaterals and business development activities that are essential for our future growth and profitability. We continue to remain optimistic for our future growth opportunities in all of our product groups. It is our primary objective to continue to capitalize on the healthy market environments in which our products are sold and focus on balancing our R&D and sales, marketing and administration investments to deliver strong financial performance and enhanced shareholder value. September 24, 2008 GENNUM CORPORATION Unaudited Consolidated Financial Statements For the Nine Months ended August 31, 2008 (Amounts in U.S. Dollars) 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 (U.S. dollars, amounts in thousands) August November 31, 2008 30, 2007 As at (unaudited) (audited) ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 55,139 34,141 Instruments held for trading (note 11) 494 1,000 Accounts receivable, net 21,581 20,951 Inventories 15,003 12,131 Prepaid expenses and other assets 5,491 4,371 Promissory notes receivable (note 13) 1,233 1,051 Loan receivable (note 13) 1,271 - Income taxes receivable 1,317 3,054 Future income taxes 16,079 20,372 Assets held for sale (note 4) - 6,576 ------------------------------------------------------------------------- Total current assets 117,608 103,647 ------------------------------------------------------------------------- Capital assets, net (note 3) 22,417 26,037 Long-term investments (note 12) 2,363 3,079 Intangible assets, net (note 14) 8,966 7,467 Loan receivable (note 13) - 658 Promissory note receivable (note 13) 941 1,749 Goodwill (note 14) 20,053 19,393 Future income taxes 1,242 893 Assets held for sale (note 4) - 922 ------------------------------------------------------------------------- 173,590 163,845 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 14,817 17,678 Deferred revenue (note 16) 427 733 Income taxes payable 621 214 Future income taxes 1,295 2,129 Liabilities related to assets held for sale (note 4) 280 1,740 ------------------------------------------------------------------------- Total current liabilities 17,440 22,494 ------------------------------------------------------------------------- Long-term payable (note 9) 2,359 2,504 Deferred revenue (note 16) 4,168 - Future income taxes 2,288 2,491 ------------------------------------------------------------------------- Shareholders' equity Capital stock (note 17) 8,627 8,680 Deferred compensation (3,358) (3,404) Retained earnings 113,677 93,200 Contributed surplus 2,141 1,078 Accumulated other comprehensive income 26,248 36,802 ------------------------------------------------------------------------- Total shareholders' equity 147,335 136,356 ------------------------------------------------------------------------- 173,590 163,845 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 23) Gennum Corporation CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (U.S. dollars, amounts in thousands except per share data) Three Months Ended Nine Months Ended August 31 August 31 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue (note 19) 33,496 25,490 96,583 71,926 Cost of goods sold 7,931 6,787 23,269 17,038 ------------------------------------------------------------------------- Gross margin 25,565 18,703 73,314 54,888 ------------------------------------------------------------------------- Sales, marketing and administration expense 9,454 5,657 26,333 16,873 Research and development expense 9,401 5,712 27,428 15,828 Amortization of intangible assets 454 79 1,348 220 Less government assistance (1,206) (948) (4,387) (2,795) ------------------------------------------------------------------------- 18,103 10,500 50,722 30,126 ------------------------------------------------------------------------- Operating income 7,462 8,203 22,592 24,762 Investment income 259 412 881 1,198 Other income (expense) (note 20) 1,687 147 2,667 (660) ------------------------------------------------------------------------- Earnings from continuing operations before income taxes 9,408 8,762 26,140 25,300 Provision for income taxes (note 21) 3,037 3,418 9,250 9,362 ------------------------------------------------------------------------- Net earnings for the period from continuing operations 6,371 5,344 16,890 15,938 Net earnings (loss) on discontinued operations, net of tax (note 4) (18) (6,835) 7,626 (19,879) ------------------------------------------------------------------------- Net earnings (loss) for the period 6,353 (1,491) 24,516 (3,941) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings (loss) per share Continuing operations - basic and diluted 0.18 0.15 0.48 0.45 Discontinued operations - basic and diluted 0.00 (0.19) 0.21 (0.55) ------------------------------------------------------------------------- Net earnings (loss) - basic and diluted 0.18 (0.04) 0.69 (0.10) ------------------------------------------------------------------------- Dividends declared per share $0.035 $0.035 $0.105 $0.105 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (Dividends declared per share - Cdn. $0.035 in both the third quarter of 2008 and 2007). Gennum Corporation CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (U.S. dollars, amounts in thousands) Three Months Ended Nine Months Ended August 31 August 31 2008 2007 2008 2007 ------------------------------------------------------------------------- Capital stock Balance at beginning of the period 8,627 8,690 8,680 8,431 Proceeds from shares issued on exercise of options - - - 259 Shares repurchased under normal course issuer bid - (11) (53) (11) ------------------------------------------------------------------------- Balance at end of the period 8,627 8,679 8,627 8,679 ------------------------------------------------------------------------- Deferred compensation Balance at beginning of the period (3,902) (1,241) (3,404) (1,782) New awards - - (1,680) (29) Forfeitures 59 92 413 260 Amortization 485 166 1,313 568 ------------------------------------------------------------------------- Balance at end of the period (3,358) (983) (3,358) (983) ------------------------------------------------------------------------- Retained earnings Balance at beginning of the period 108,555 99,308 93,200 103,936 Net earnings (loss) 6,353 (1,491) 24,516 (3,941) Dividends (1,231) (1,175) (3,723) (3,353) Repurchase of common shares - (351) (316) (351) ------------------------------------------------------------------------- Balance at end of the period 113,677 96,291 113,677 96,291 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of the period 1,729 505 1,078 83 Stock option amortization 412 307 1,063 729 ------------------------------------------------------------------------- Balance at end of the period 2,141 812 2,141 812 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of income taxes Balance at beginning of the period 37,055 27,597 36,802 20,089 Transition adjustment on adoption of financial instruments standards - - - (675) Other comprehensive (loss) income for the period (10,807) 912 (10,554) 9,095 ------------------------------------------------------------------------- Balance at end of the period 26,248 28,509 26,248 28,509 ------------------------------------------------------------------------- Total shareholders' equity at end of the period 147,335 133,308 147,335 133,308 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gennum Corporation CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (U.S. dollars, amounts in thousands) Three Months Ended Nine Months Ended August 31 August 31 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings (losses) for the period 6,353 (1,491) 24,516 (3,941) Other comprehensive income (loss), net of income taxes Change in unrealized gains (losses) on translating financial statements to U.S. dollar reporting (9,820) 2,027 (9,142) 9,350 Change in gains (losses) on derivative instruments designated as cash flow hedges(1) (806) (25) (1,242) 622 Reclassification to earnings of gains (losses) on cash flow hedges(2) 25 (341) 402 (182) Change in unrealized (losses) gains on available for sale financial assets (206) (749) (572) (695) ------------------------------------------------------------------------- Comprehensive income (loss) for the period (4,454) (579) 13,962 5,154 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) - Net of income taxes of $399 and $618 for the quarter and year to date respectively (2007 - $19 and $354) (2) - Net of income taxes of $$12 and $203 for the quarter and year to date respectively (2007 - $189 and $95) Gennum Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (U.S. dollars, amounts in thousands) Three Months Ended Nine Months Ended August 31 August 31 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings from continuing operations for the period 6,371 5,344 16,890 15,938 Items not affecting cash Depreciation and amortization 1,798 1,511 5,428 4,487 Deferred compensation and stock option amortization 864 568 2,320 1,302 Future income taxes 2,054 (1,437) 2,045 (6,519) Other (57) (59) (177) (59) ------------------------------------------------------------------------- 11,030 5,927 26,506 15,149 Net change in non-cash working capital balances related to continuing operations (821) 1,432 (9,103) (10,792) ------------------------------------------------------------------------- Cash provided by operating activities of continuing operations 10,209 7,359 17,403 4,357 Cash (used in) provided by operating activities of discontinued operations 25 (917) (7,786) 1,184 ------------------------------------------------------------------------- Cash provided by operating activities 10,234 6,442 9,617 5,541 ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of capital assets (3,890) (804) (11,070) (2,416) Payment of license fees and deferred development charges (1,407) (281) (2,184) (281) Loans advanced - (615) - (615) Acquisition, cash acquired 123 - 123 - Acquisition, other than cash acquired (1,716) - (2,639) - Proceeds from sale of VXP - - 18,302 - Proceeds from sale of land and building 13,285 - 17,575 - Sale of CellPoint investment - - 502 - Promissory note receivable - (270) - (270) ------------------------------------------------------------------------- Cash provided by (used in) investing activities of continued operations 6,395 (1,970) 20,609 (3,582) Cash provided by (used in) investing activities of discontinued operations - 549 105 (190) ------------------------------------------------------------------------- Cash provided by (used in) investing activities 6,395 (1,421) 20,714 (3,772) ------------------------------------------------------------------------- FINANCING ACTIVITIES Stock options exercised - - - 259 Deferred compensation awarded, net of forfeitures 66 93 (1,509) 232 Shares repurchased under normal course issuer bid - (362) (370) (362) Dividends paid (1,231) (1,175) (3,723) (3,353) ------------------------------------------------------------------------- Cash used in financing activities (1,165) (1,444) (5,602) (3,224) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (3,471) 663 (3,731) 2,474 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period 11,993 4,240 20,998 1,019 Cash and cash equivalents, beginning of the period 43,146 38,320 34,141 41,541 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents, end of the period 55,139 42,560 55,139 42,560 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the third quarter of 2008, interest expense paid was nil (2007 - nil) and income taxes paid was $540 (2007 - $1,215). For the first nine months of the year, interest expense paid was nil (2007 - nil) and income taxes paid were $895 (2007 - $2,466). Cash and cash equivalents is comprised of $8,461 in cash and $46,678 in cash equivalents (November 30, 2007 - Cash - $9,612 and cash equivalents - $24,529). GENNUM CORPORATION Notes to Consolidated Financial Statements (U.S. dollars, amounts in thousands except share and per share data) 1. ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared by Gennum Corporation ("Gennum" or 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, 2007. (a) 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 is 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. (b) 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. (c) Research and development costs The Company follows the guidance in the CICA Handbook Section 3450, "Research and Development Costs". Up until February 29, 2008, expenditures such as research and development costs were expensed as incurred since the criteria for deferment of such costs were not met. However, effective March 1, 2008, the criteria for deferment of eligible costs were met. These criteria include whether the product and cost are clearly defined, the technical feasibility has been established, management has indicated its intention to produce and market the product, the future market is clearly defined and adequate resources are expected to be available to complete the product. Upon commercial launch of the product, these costs are amortized over the number of expected product life unit sales. Expenditures such as research costs continue to be expensed as incurred. (d) Leases The Company follows the guidance in the CICA Handbook Section 3065, "Leases". Leases are classified as capital or operating leases. A lease that transfers substantially all the benefits and risks incident to the ownership of property is classified as a capital lease. All other leases are accounted for as operating leases whereby lease payments are expensed. (e) Deferred gain Deferred gain represents the unamortized portion of the gain arising on the sale of property, which is amortized over the life of the property lease and included in deferred revenue. Changes in accounting policies Effective December 1, 2007, the Company adopted the following Canadian Institute of Chartered Accountants (CICA) Handbook Sections: CICA Handbook Section 3862, "Financial Instruments - Disclosures", and Section 3863, "Financial Instruments - Presentation", which together modify the disclosure and presentation requirements for CICA Handbook Section 3861. These sections have been applied in accordance with the related transitional provisions, which do not require restatement of prior periods. CICA Handbook Section 3861 required disclosure that enables a user of the financial statements to evaluate the significance of the Company's financial instruments and the nature and extent of risks arising from those financial instruments. CICA Handbook Section 3863 carries forward the presentation requirements of CICA Handbook Section 3861. The new disclosures are included in note 18. CICA Handbook Section 1535, "Capital Disclosures" requires the Company to make new disclosures to enable users of the financial statements to evaluate the Company's objectives, policies and procedures for managing capital. These new disclosures are shown in note 22. 2. CHANGE OF REPORTING CURRENCY Effective December 1, 2007, the Company adopted the U.S. dollar as its reporting currency, but has retained the Canadian dollar as its functional currency. Management believes that reporting in U.S. dollars improves the comparability of the Company's financial position and results of operations to others in its industry. As a result of adopting the U.S. dollar as its reporting currency for both the current and prior periods, the cumulative translation adjustment effects of prior periods have been reflected in the opening balance for the fiscal year in accumulated other comprehensive income. In accordance with Canadian GAAP, the Company uses the current rate method to translate all amounts presented to U.S. dollars. Under the current rate method, all assets and liabilities of the Company's operations are translated from their Canadian dollar functional currency into U.S. dollars using exchange rates in effect at the end of the reporting period; revenue, expenses and cash flows are translated at the average rates during the reporting period; and any associated translation gains or losses are recorded as a separate component of shareholders' equity in accumulated other comprehensive income. All comparative figures presented have been translated using the same method. For the third quarter ended August 31, 2008 and for the first nine months of the year, revenue and expenses have been translated from Canadian dollars to U.S. dollars at the monthly average rates, and cash flows at the quarterly average rates. Assets and liabilities have been translated at the period end rate of $0.9411 (November 30, 2007 - $0.9992) Canadian dollars per one U.S. dollar. References to fiscal year 2007 figures in the notes to the consolidated financial statements have been translated using the respective quarterly average historical rates, except for balance sheet figures, which have been translated using the respective ending balance sheet rates. 3. CAPITAL ASSETS August 31, 2008 November 30, 2007 ------------------------------------------------------------------------- Land 1,320 2,062 Buildings 60 7,995 Equipment and furniture 20,582 13,511 Computer software and hardware 455 2,469 ------------------------------------------------------------------------- 22,417 26,037 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The depreciation expense for buildings, equipment and furniture and computer software and hardware in the third quarter of 2008 was $73, $961 and $246, respectively (2007 - $84, $868 and $269). For the first nine months of 2008, depreciation expense was $321, $3,002 and $759, respectively (2007 - $307, $2,585 and $825). The 2007 carrying values of capital assets associated with the Company's divestiture activities have been reclassified to assets held for sale (see note 4). 4. RECONCILIATION OF ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS As part of the Company's 2007 and future strategic initiatives to focus and deliver on innovative optical and analog and mixed-signal solutions to the world, management conducted a detailed assessment and prioritization of the entire portfolio of businesses and technologies. As a result of the assessment, key strategic activities included the divestiture activities of our non-core businesses that included Consumer Headsets (see note 5), Hearing and Manufacturing Operations (see note 6), VXP(R) Image Processing (see note 7) and Falcon(TM) wireless technology (see note 8). As a result of the aforementioned divestitures, certain figures for 2007 and 2008 for assets and liabilities and operating results have been re- classified to assets and liabilities held for sale, and operating results to discontinued operations in accordance with CICA Handbook Section 3475, "Disposal of Long-Lived Assets and Discontinued Operations". Net loss of $18 from discontinued operations in the third quarter of 2008 was attributable to the Hearing and VXP(R) components. The following table summarizes the reclassifications for the nine months ended August 31, 2008: ------------------------------------------------------------------------- Nine months ended August 31, 2008 ------------------------------------------------------------------------- Falcon(TM) Headset Hearing VXP(R) TOTAL /Mfg(2) 1,2 ------------------------------------------------------------------------- Revenue --- --- --- 1,290 1,290 Operating loss, before tax --- --- (423) (3,258) (3,681) Gain (loss) on sale --- --- (1,173) 12,825 11,652 ------------------------------------------------------------------------- --- --- (1,596) 9,567 7,971 Income tax (expense) recovery --- --- 525 (870) (345) ------------------------------------------------------------------------- Net earnings (loss) from discontinued operations, net of tax --- --- (1,071) 8,697 7,626 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The gain on sale is considered a capital gain and is therefore only 50% taxable. In addition, the use of loss carryforwards also reduced the income tax expense. (2) The liabilities of $280 associated with assets held for sale as at August 31, 2008 is related to VXP(R) and Hearing severance costs that will be paid out over the remaining months in 2008 as part of certain employees' severance agreements. Assets and Liabilities Held for Sale ------------------------------------------------------------------------- As at November 30, 2007 ------------------------------------------------------------------------- Headset Hearing VXP(R) TOTAL /Mfg ------------------------------------------------------------------------- ASSETS Current Accounts receivable, net - - 673 673 Inventories - - 804 804 Prepaid expenses - - 153 153 Capital assets, net - 4,946 - 4,946 Intangible assets, net - - - - ------------------------------------------------------------------------- Total current assets held for sale - 4,946 1,630 6,576 ------------------------------------------------------------------------- Long-Term Capital assets, net - - 540 540 Intangible assets, net - - 382 382 ------------------------------------------------------------------------- Total long-term assets held for sale - - 922 922 ------------------------------------------------------------------------- LIABILITIES Current Accounts payable and accrued liabilities - 675 1,065 1,740 ------------------------------------------------------------------------- Total current liabilities held for sale - 675 1,065 1,740 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Discontinued Operations ------------------------------------------------------------------------- Three months ended August 31, 2007 ------------------------------------------------------------------------- Falcon Headset Hearing VXP(R) TOTAL (TM) /Mfg ------------------------------------------------------------------------- Revenue - 536 5,366 1,287 7,189 Operating loss, before tax (644) (559) (40) (2,194) (3,437) Loss on sale - (314) (6,624) - (6,938) ------------------------------------------------------------------------- (644) (873) (6,664) (2,194) (10,375) Income tax recovery 220 298 2,274 748 3,540 ------------------------------------------------------------------------- Net loss on discontinued operations, net of tax (424) (575) (4,390) (1,446) (6,835) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine Months Ended August 31, 2007 ------------------------------------------------------------------------- Falcon Headset Hearing VXP(R) TOTAL (TM) /Mfg ------------------------------------------------------------------------- Revenue - 1,146 16,566 4,351 22,063 Operating loss, before tax (2,424) (4,344) (9,579) (6,890) (23,237) Loss on sale - (314) (6,624) - (6,938) ------------------------------------------------------------------------- (2,424) (4,658) (16,203) (6,890) (30,175) Income tax recovery 827 1,589 5,529 2,351 10,296 ------------------------------------------------------------------------- Net loss on discontinued operations, net of tax (1,597) (3,069) (10,674) (4,539) (19,879) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 5. SALE OF CONSUMER HEADSET BUSINESS On August 24, 2007, the Company sold its Consumer Headset product line to CellPoint Connect (Canada) Inc. ("CellPoint") in exchange for $1,877 in shares of CellPoint's parent company, CellPoint Connect AB ("CellPoint Connect"), a publicly traded company on the Aktie Torget stock exchange in Sweden, (see note 11) and a $281 promissory note, due September 30, 2008. The promissory note was discounted to $270 using the effective interest method, resulting in interest income of $11 that will be recognized as income from continuing operations over the term of the note (see note 13). The Company is also entitled to performance-based payments of up to $938 payable on or before March 15, 2009. No accrual has been made for this amount as management does not believe it is likely this will materialize. The Company has extended a loan to CellPoint in two separate advances of $610. The advances are non-revolving and interest bearing at a fixed interest rate of 5%, compounded quarterly. The initial repurchase of CellPoint Connect shares occurred in February 2008, and the second repurchase is expected to occur in the fourth quarter of 2008. The advances, including accrued interest, were originally due February 26, 2009, but have been amended such that the due date is now October 31, 2008. The sale of the Consumer Headset product line resulted in a loss of $367, net of transaction costs, and was part of the Company's Audio & Wireless business unit. The loss was calculated as follows: Accounts receivable 451 Inventories 1,775 Capital assets, net 141 Transaction costs 235 Accounts payable and accrued liabilities (88) ------------------------------------------------------------------------- 2,514 ------------------------------------------------------------------------- Proceeds: Promissory note 270 CellPoint shares 1,877 ------------------------------------------------------------------------- Loss on sale 367 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The third quarter and year to date August 31, 2007 operating results related to the Company's Consumer Headset product line have been re- classified as discontinued operations in accordance with the CICA Handbook Section 3475, "Disposal of Long-Lived Assets and Discontinued Operations" (see note 4). 6. SALE OF HEARING INSTRUMENT AND MANUFACTURING OPERATIONS On October 19, 2007, the Company completed the sale of its Hearing Instrument and Manufacturing Operations, excluding the manufacturing land and building, to Sound Design Technologies Ltd ("Sound Design"), a Gores Equity, LLC portfolio company for $5,055 in cash and a $2,503 interest bearing promissory note. The promissory note bears a fixed interest rate of 5% per annum with scheduled quarterly principal payments of $250 beginning in April 2008, and the remaining balance plus accrued interest due in April 2010. An advance of $676 was also made by Sound Design on the manufacturing land and building that were sold subsequent to year-end to a third party for an additional $4,331, who in turn leased the manufacturing land and building to Sound Design. In addition, following the close of the disposal transaction, we are receiving fees from Sound Design to provide certain administrative functions for a limited period of time and for the lease of office space. We do not have any significant continuing involvement in or retain any ownership interest in these operations and, therefore, the continuing cash flows are not considered direct cash flows of the disposal group. During 2007, an initial non-cash impairment charge totaling $8,398 was taken on the manufacturing group of assets with an additional impairment charge of $664 taken in the fourth quarter of 2007 as it was determined that the fair value was less than carrying value. The impairment charge has been included as part of the loss on discontinued operations. The sale of the Hearing Instrument and Manufacturing Operations, excluding the manufacturing land and building, resulted in a loss of $7,756, and was part of the Company's Audio & Wireless business unit. The loss on the sale was calculated as follows: Accounts receivable 3,631 Inventories 10,389 Prepaid and other assets 288 Capital assets, net 342 Intangible assets 115 Transaction costs 1,823 Accounts payable and accrued liabilities (1,274) ------------------------------------------------------------------------- 15,314 Cash 5,055 Promissory note 2,503 ------------------------------------------------------------------------- Loss on sale recognized in fiscal year 2007 7,756 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The November 30, 2007 assets and liabilities and the third quarter and year to date August 31, 2008 and 2007 operating results related to the Company's Hearing Instrument and Manufacturing Operations have been reclassified as assets held for sale and discontinued operations in accordance with the CICA Handbook Section 3475, "Disposal of Long-Lived Assets and Discontinued Operations" (see note 4). 7. SALE OF VXP(R) IMAGE PROCESSING BUSINESS On February 8, 2008, the Company completed the sale of its VXP(R) Image Processing business to Sigma Designs for $18.2 million. The sale of the VXP(R) Image Processing business has also resulted in the termination of approximately 30 employees in January 2008. Following the close of the disposal transaction, we received our final payment of fees from Sigma Designs in June 2008 for providing certain administrative functions and for the lease of office space. We do not have any significant continuing involvement in or retain any ownership interest in these operations and, therefore, the continuing cash flows are not considered direct cash flows of the disposal group. The sale of the VXP(R) Image Processing business resulted in a gain of $13,464 and was calculated as follows: Accounts receivable 877 Inventories 1,284 Prepaid and other assets 135 Capital assets, net 1,108 Intangible assets 382 Transaction costs 1,171 Accounts payable and accrued liabilities (221) ------------------------------------------------------------------------- 4,736 Cash 18,200 ------------------------------------------------------------------------- Gain on sale 13,464 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The November 30, 2007 assets and liabilities and the third quarter and year to date August 31, 2008 and 2007 operating results related to the Company's VXP(R) Image Processing business have been reclassified as assets held for sale and discontinued operations in accordance with the CICA Handbook Section 3475, "Disposal of Long-Lived Assets and Discontinued Operations" (see note 4). 8. FALCON(TM) BUSINESS ABANDONMENT Subsequent to the strategic alternative review for the Audio & Wireless division and with the Company's ongoing strategy to focus on its core products, management was unable to find a bona-fide buyer for the Falcon(TM) product line and it was abandoned in the fourth quarter of 2007. The abandonment resulted in the write off of all assets related to the Falcon(TM) product line in the fourth quarter of 2007, including the balance of $1,273 against the long-term prepaid royalty and $441 on the remaining balances related to accounts receivable, prepaids, inventory and capital assets; severance costs associated with the abandonment were approximately $130. The third quarter and year to date August 31, 2007 operating results associated with the Falcon(TM) product line have been reclassified to discontinued operations (see note 4). 9. ACQUISITION - SNOWBUSH On October 30, 2007, the Company acquired 100% of the shares of Zeptonics Corp., the holding company of Snowbush Microelectronics Inc., for a total initial consideration of $25,349 including transaction costs of $631. The initial consideration was comprised of $17,325 in cash, the assumption of accounts payable of $263 and the following future cash outlays: a) Deferred cash payments totaling $3,764 with one third of the total due each subsequent year following the anniversary date of the acquisition; $2,359 has been classified as a long-term payable. The deferred cash payments have been discounted at 6% using the effective interest rate method. The amortization of the discount will be accounted for as a purchase price adjustment to goodwill over the three-year period. b) Estimated deferred equity payment of $3,779. The deferred equity relates to the deliverance of 386,085 of the Company's common shares and occurred in February 2008. To hedge against the price risk associated with the purchase of the deferred equity, the Company entered into a cash-settled share forward transaction with a major financial institution, whereby the financial institution purchased the 386,085 common shares in the open market for $4,199, plus $75 of deal-related costs. The difference between the estimated deferred equity payment and actual cost of the common share purchase and deal- related costs was accounted for as a purchase price adjustment to goodwill in the first quarter of 2008. c) The initial consideration excluded deferred work in process (WIP) payments. The deferred WIP contract relates to payments on post acquisition proceeds received, less costs incurred to complete, for certain contracts that existed on the acquisition date with payments to be made over a period of six quarters, with the first quarter ending January 31, 2008. In the third quarter of 2008, there was a WIP contract payment accrual for $96. On a year-to-date basis, the WIP contract payment accrual was $669 and has been reflected as a purchase price adjustment to goodwill. The estimated remaining WIP contract payments will be accounted for as a purchase price adjustment in subsequent periods. In the third quarter of 2008, the purchase price was increased by $132 for transaction costs, the amortization of the discount on the deferred cash payments and WIP contract payment adjustments. On a year-to-date basis, the purchase price was adjusted for the amortization of the discount on the deferred cash payment, the actual cost associated with the purchase of the deferred equity, accrual for the quarterly WIP contract payments and transaction costs, totaling $1,142, resulting in an adjusted total consideration of $26,491. The acquisition was accounted for under the purchase method and the operating results have been included in the Company's operating results from the acquisition date. The purchase price allocation is assigned to the net identifiable assets acquired based on their fair values as follows and is adjusted quarterly for deferred WIP contract payments: Cash 3,056 Accounts receivable 2,563 Prepaids and other assets 223 Income taxes recoverable 746 Capital assets 613 Future income taxes 424 Identifiable intangible assets subject to amortization Technology 4,104 Supplier relationships 1,301 In process development 701 Customer value 110 Contracts in process 140 ------------------------------------------------------------------------- 13,981 ------------------------------------------------------------------------- Accounts payable and accrued liabilities (644) Deferred revenue (615) Income taxes payable (155) Dividends payable (1,602) Future income taxes (2,511) ------------------------------------------------------------------------- (5,527) ------------------------------------------------------------------------- Excess of adjusted purchase price over fair value of identifiable net assets acquired (goodwill) (note 14) 18,037 ------------------------------------------------------------------------- Total adjusted purchase price, including transaction costs 26,491 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. ACQUISITION - ASIC On July 25, 2008, the Company acquired 100% of the shares of ASIC Architect, Inc. for a total initial cash consideration of $1,564, including transaction related costs of $64, and the following future cash considerations: a) Working capital surplus - a cash payment is required if the working capital of ASIC Architect on completion of the transaction is in a surplus position; an accrual for $31 has been made to account for a working capital surplus and has been accounted for as an increase in the purchase price and goodwill. b) Earn-out - earn-out payments are required based on attaining certain annual IP sales thresholds in the next three years. This contingent consideration has not been accounted for in the initial purchase price; however, any future payments will be treated as a purchase price adjustment. The Company allocated the purchase price on a preliminary basis to the identified assets and liabilities acquired based on their estimated fair values at the time of acquisition. The acquisition was accounted for under the purchase method and the operating results have been included in the Company's operating results from the acquisition date. The preliminary purchase price allocation was assigned to the net identifiable assets acquired based on their preliminary fair values as follows: Cash 122 Accounts receivable 164 Prepaids and other assets 14 Capital assets 33 Identifiable intangible assets subject to amortization Technology 363 Customer relationships 20 In process development 137 Customer value 314 Contracts in process 324 ------------------------------------------------------------------------- 1,491 ------------------------------------------------------------------------- Accounts payable and accrued liabilities (208) Deferred revenue (55) Future income taxes (464) ------------------------------------------------------------------------- (727) ------------------------------------------------------------------------- Excess of adjusted purchase price over fair value of identifiable net assets acquired (goodwill) (note 14) 831 ------------------------------------------------------------------------- Total adjusted purchase price, including transaction costs 1,595 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 11. INSTRUMENTS HELD FOR TRADING On August 24, 2007, the Company received a 9% interest, or $1,877, in shares of CellPoint Connect (2.3 million shares) as partial consideration for the sale of its Consumer Headset product line (see note 5). The agreement with CellPoint required them to repurchase $939 of the shares based on the price at which the shares were issued in two installments of $469 each, translated at historical rates to U.S. dollars. The first repurchase occurred in February 2008. The shares related to the second repurchase are due to be purchased in the fourth quarter and have been classified as held for trading. They are recorded on the balance sheet at $494, their market price at the time of issuance translated to U.S. dollars at current rates. The portion of shares which are not designated for repurchase by CellPoint are recorded on the balance sheet at their market value of $978 and are classified as available for sale under long-term investments. 12. LONG-TERM INVESTMENTS In November 2005, the Company received a 6% interest, or $2,734, 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 $1,385 as at August 31, 2008 (November 30, 2007 - $2,563). This investment has been classified as available for sale and is therefore recorded on the balance sheet at its fair value with the decrease in the fair value of $294 in the third quarter of 2008 recorded in Other Comprehensive Income. The year-to-date decrease in fair value of $1,092 is recorded in Other Comprehensive Income. Fair value is based on the trading price of the shares and the impact of currency fluctuations. As described in note 11, half of the original investment in CellPoint Connect shares with a fair market value of $978 has been classified as available for sale under long-term investments. In the third quarter of 2008, an unrealized increase in market value of $88 was recorded to Other Comprehensive Income. On a year-to-date basis, an unrealized increase of $520 was recorded to Other Comprehensive Income. 13. PROMISSORY NOTES AND LOAN RECEIVABLE On August 24, 2007, the Company sold its Consumer Headset product line to CellPoint (see note 5). The proceeds included a $281 non-interest bearing promissory note, due September 30, 2008. The promissory note has been discounted to $270 using the effective interest method, resulting in interest income of $11 that will be recognized over the term of the note. The promissory note, including accrued interest, of $281 has been classified as a current asset. In addition, the Company extended a $1,220 loan to CellPoint, bearing interest at a fixed interest rate of 5%, compounded quarterly. The loan, including accrued interest, of $1,271 is due October 31, 2008. On October 19, 2007, the Company received $2,503 in an interest bearing promissory note as part of the consideration received from the sale of the Hearing and Manufacturing Operations to Sound Design Technologies Ltd. The promissory note bears interest at a fixed interest rate of 5% per annum with scheduled quarterly principal payments of Cdn. $250 which began in April 2008, and the remaining balance plus accrued interest due in April 2010 (see note 6). The balance of $952, including accrued interest, has been classified as a current asset, and $941 as long-term. 14. GOODWILL AND INTANGIBLE ASSETS (i) Goodwill Goodwill of $1,889 was acquired in the purchase of SiGe Semiconductor Inc.'s LightCharger(TM) optical networking business in May 2004. On October 2007, additional goodwill of $16,895 was acquired through the purchase of 100% of the shares of Zeptonics (see note 9). As discussed in note 9, there was an adjustment to goodwill of $132 in the third quarter of 2008, and a year-to-date adjustment of $1,142. There will be continuing adjustments for the remainder of 2008. On July 25, 2008, goodwill of $831 was acquired through the purchase of 100% of the shares in ASIC (see note 10). Goodwill is reviewed annually for impairment. There were no impairment issues relating to goodwill in the third quarter or year to date in 2008 or 2007. For reconciliation purposes only, the following table summarizes goodwill balances translated to U.S. dollars at the historical exchange rates which were in effect at the dates of acquisition and the adjustment required to translate from historical rates to the respective balance sheet rates: August November 31, 2008 30, 2007 ------------------------------------------------------------------------- SiGe Semiconductor Inc. 1,889 1,889 Snowbush Microelectronics Inc. 18,037 16,895 ASIC Architect, Inc. 831 - Exchange translation (704) 609 ------------------------------------------------------------------------- 20,053 19,393 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (ii) Intangible Assets August November 31, 2008 30, 2007 ------------------------------------------------------------------------- License fees 215 179 SiGe acquisition Technology 2,090 2,219 Snowbush acquisition Technology 3,859 4,097 Supplier relationships 1,223 1,299 In process development 659 699 Customer value 104 110 Contracts in process 132 140 ASIC acquisition Technology 348 - Customer relationship 19 - In process development 132 - Customer value 301 - Contracts in process 311 - Deferred development charges 2,050 - ------------------------------------------------------------------------- 11,443 8,743 Less accumulated amortization (2,477) (1,276) ------------------------------------------------------------------------- 8,966 7,467 ------------------------------------------------------------------------- ------------------------------------------------------------------------- License fees are amortized using the straight-line method over the estimated useful lives ranging from three to five years. The intangible asset resulting from the SiGe Semiconductor Inc. acquisition in May 2004 is amortized using the straight-line method over the estimated useful life of seven years. Intangible assets resulting from the Snowbush acquisition in October 2007 are amortized using the straight-line method over the estimated useful lives ranging from one to five years. Intangible assets resulting from the ASIC acquisition in July 2008 are amortized using the straight-line method over the estimated useful lives ranging from five to ten years. Deferred development charges represent expenditures that are directly related to placing a new product into commercialization when the expenditure is incremental in nature and it is probable that the expenditure is recoverable from future operations of the associated product. Upon commercial launch of the product, these costs are amortized over the number of expected product life unit sales to a maximum of five years. To date, there have been no amortization expenses or write-offs on deferred development charges. No intangible assets were written off in the third quarter or in the first nine months of 2008 and 2007. Amortization expense for the third quarter and the first nine months of 2008 was $454 and $1,348, respectively (2007 - $79 and $220 respectively). The 2007 carrying value of intangible assets associated with the Company's divestiture activities have been reclassified to assets held for sale (see note 4). 15. SALE LEASEBACK On August 15, 2008, the Company sold its land and office building located at 4281 Harvester Road for net proceeds of $13,115, and concurrently entered into a 15-year leaseback arrangement with the purchaser of the property. The $4,618 gain arising on the disposal of the property was recorded as deferred revenue and is being amortized over the lease term. As at August 31, 2008, the unamortized gain was $4,447. The provisions of the lease provide for a 15-year term with an option to extend for two five-year terms, at the option of the Company. The lease has been accounted for as an operating lease as the criteria for such a lease under CICA Handbook Section 3065, "Leases" have been met. Minimum lease payments for the first five years, the next five years and the final five years are $4,960, $5,280, and $5,600, respectively. 16. DEFERRED REVENUE Deferred revenue is comprised of the unamortized gain on the sale leaseback transaction (see note 15) and billings in excess of earned revenue with respect to IP revenue. As at August 31, 2008, the unamortized gain was $4,447, of which $279 was classified as current and the balance as long term, and billings in excess of earned revenue were $148. 17. CAPITAL STOCK The Company has authorized an unlimited number of common shares with no par value, of which 35,607,186 common shares of the Company (November 30, 2007 - 35,775,086) were issued and outstanding as at August 31, 2008 with a stated value of $8,627 (November 30, 2007 - $8,680). An unlimited number of preferred shares have also been authorized, none of which have been issued. No. of Stated Reconciliation of shares outstanding Shares Value ------------------------------------------------------------------------- Number of shares outstanding, November 30, 2007 35,775,086 $8,680 Stock options exercised - - Shares repurchased under normal course issuer bid(*) (156,600) (51) ------------------------------------------------------------------------- Number of shares outstanding, February 29, 2008 35,618,486 8,629 Shares repurchased under normal course issuer bid (11,300) (2) ------------------------------------------------------------------------- Number of shares outstanding, August 31, 2008 35,607,186 8,627 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) 131,800 shares repurchased in the fourth quarter of 2007 for approximately $1,407 are included as the shares were not cancelled until the first quarter of 2008. During 2007, the Company announced a normal course issuer bid to acquire up to 3.5 million of its common shares. The normal course issuer bid commenced on July 3, 2007 and terminated on July 2, 2008. During the first nine months of 2008, the Company repurchased 36,100 common shares (2007 - nil) under the bid for approximately $103 (2007 - nil). The net excess of the repurchase price over the issue price is allocated to shareholders' equity. Options to purchase common shares The Company has an incentive stock option plan which provides for the granting of options for the benefit of employees and officers. The total number of common shares of the Company that may be issued under this plan is 2,700,000, of which 1,042,461 remain available for new grants. No stock options were issued outside the plan to new officers upon hiring in the third quarter of 2008. Options issued outside the plan are governed by the same conditions as applicable to the incentive stock option plan. Subsequent to August 31, 2008, 50,000 stock options were granted pursuant to the provisions of the Company's incentive stock option plan. All options are granted for a term of seven years from the grant date with vesting of 25% at the end of the first, second, third and fourth years from the date of grant, respectively. All options allow the holder to purchase common shares at a price equal to the market price of such shares at the date of grant. A summary of all options to purchase common shares of the Company granted pursuant to the Company's incentive stock option plan and granted outside of such plan is as follows: YTD 2008 YTD 2007 ------------------------------------------------------------------------- Weighted Weighted average average exercise exercise Number price Number price of shares (Cdn.$) of shares (Cdn.$) ------------------------------------------------------------------------- Outstanding, beginning of year 2,065,885 11.65 1,428,965 11.53 Granted 536,867 10.07 770,000 12.80 Forfeited (373,175) 12.77 (137,550) 12.49 Exercised - - (25,650) 11.62 ------------------------------------------------------------------------- Outstanding, end of third quarter 2,229,577 11.68 2,035,765 11.93 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options exercisable at August 31, 2008 563,987 11.33 556,563 12.47 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes information about all options to purchase common shares of the Company outstanding at August 31, 2008: Options outstanding Options Exercisable ------------------------------------------------------------------------- Weighted Weighted Weighted average average average Range of remaining exercise exercise exercise Number contractual price Number price prices (Cdn.$) outstanding life (Cdn.$) exercisable (Cdn.$) ------------------------------------------------------------------------- $8.60 - $12.00 1,521,425 5.1 years 10.23 344,188 10.88 ------------------------------------------------------------------------ $12.01 - $14.25 708,152 5.3 years 12.95 219,799 12.97 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated weighted average fair value of stock options granted during the first nine months of 2008 was Cdn. $2.82 (first nine months of 2007 - Cdn. $4.10) per share using the Black-Scholes option-pricing model with the following weighted average assumptions: ------------------------------------------------------------------------- Risk-free interest rate 3.13% Expected dividend yield 1.4% Expected volatility 29.1% Expected time until exercise 5.5 years ------------------------------------------------------------------------- ------------------------------------------------------------------------- The number and weighted average grant-date fair value of restricted shares of the Company granted under the employee incentive plans in the third quarter of 2008 were nil and nil (2007 - nil and nil), respectively. For the first nine months of the year, the number and weighted average grant-date fair value of restricted shares were 187,088 and Cdn. $9.03 (2007 - 2,538 and Cdn. $13.00), respectively. 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 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings from continuing operations 6,371 5,344 16,890 15,938 Net earnings (loss) from discontinued operations (18) (6,835) 7,626 (19,879) ------------------------------------------------------------------------- Net earnings (loss) for the period 6,353 (1,491) 24,516 (3,941) ------------------------------------------------------------------------- Weighted average shares outstanding (numbers in thousands) 35,607 35,792 35,618 35,797 Effect of dilutive stock options 5 - 80 21 ------------------------------------------------------------------------- Diluted weighted average shares outstanding 35,612 35,792 35,698 35,818 ------------------------------------------------------------------------- Earnings per share Earnings per share from continuing operations - basic and diluted 0.18 0.15 0.48 0.45 Earnings (loss) per share from discontinued operations - basic and diluted 0.00 (0.19) 0.21 (0.55) ------------------------------------------------------------------------- Earnings (loss) per share - basic and diluted 0.18 (0.04) 0.69 (0.10) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options to purchase 1,723,689 common shares were not included in the computation of diluted earnings per share for the quarter ended August 31, 2008 because the option exercise prices and unamortized compensation costs were greater than the average market price of the common shares. 18. FINANCIAL INSTRUMENTS The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measure of risks as at August 31, 2008: (a) Fair Value The carrying amounts for cash and cash equivalents, accounts receivable, other assets, loan receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. Promissory notes receivable are accounted for at amortized cost using the effective interest rate method. The long-term payable resulting from the Snowbush acquisition (note 9) was recorded at its fair value with the resulting discount being amortized to goodwill as a purchase price adjustment. (b) Foreign Exchange Rate Risk Adoption of U.S. Dollar Reporting As described in note 2, the Company has adopted the U.S. dollar as its reporting currency, but has retained its functional currencies. Management believes that reporting in U.S. dollars improves the comparability of the Company's financial position and results of operations to others in its industry. In accordance with Canadian GAAP, the Company uses the current rate method to translate all amounts presented from Canadian to U.S. dollars. Under the current rate method, all assets and liabilities of the Company's operations are translated from their Canadian dollar functional currency into U.S. dollars using exchange rates in effect at the end of the reporting period; revenue, expenses and cash flows are translated at the average rates during the reporting period; and any associated translation gains or losses are recorded as a separate component of shareholders' equity. All comparative figures presented have been translated using the same method. For the third quarter ended August 31, 2008 and for the first nine months of the year, revenue and expenses have been translated from Canadian dollars to U.S. dollars at the monthly average rates, and cash flows at the quarterly average rates. Assets and liabilities have been translated at the period end rate of $0.9411 (November 30, 2007 - $0.9992) Canadian dollars per one U.S. dollar. References to fiscal year 2007 figures in the notes to the consolidated financial statements have been translated using the respective quarterly average historical rates, except for balance sheet figures, which have been translated using the respective ending balance sheet rates. Canadian Dollar Functional Currency Reporting Transactions and balances denominated in currencies other than Canadian dollars are translated on the following basis. Current assets and 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 U.S. $18,700 and Japanese yen 964,000 as at August 31, 2008. These contracts mature at the latest on August 26, 2009 at exchange rates varying between Canadian $0.9833 and Canadian $1.0484 against the U.S. dollar, and between Canadian $0.0090 and Canadian $0.00984 against the Japanese yen. Management estimates that a loss of $1,271 would be realized if the contracts were terminated on August 31, 2008. The fair values of the foreign exchange forward contracts are based on market information from major financial institutions. These forward contracts are considered cash flow hedges and therefore a loss of $850, net of future income tax asset, has been included in Other Comprehensive Income. This loss is expected to be reclassified to net income over the next twelve months as the forward contracts mature. During the third quarter and for the first nine months of the year, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized losses on foreign exchange forward and spot contracts were $61 for the third quarter of 2008 (2007 - realized gains were $480). For the first nine months of the year, the realized gains were $710 (2007 - realized gains were $203). In the third quarter of 2008, management estimates that revenue net of purchases, royalty payments and operating expenses resulted in currency exposures of about U.S. $18.0 million and 0.8 billion yen. Before hedging, our sensitivity to a change of (+/-) one cent in the U.S. to Canadian dollar exchange rate and (+/-) one yen to the Canadian dollar exchange was approximately $0.2 million and $0.1 million respectively, on a pre-tax basis, in Canadian Dollars. (c) Credit Risk The Company is exposed to commercial credit risk from its customers in the normal course of business, which is mitigated by the Company's credit management policies. The Company is exposed to credit risk from potential default by any of its counterparties on its foreign exchange contracts and manages this credit risk by dealing only with major financial institutions with high credit ratings. Credit risks associated with holders of promissory notes are managed through regular communication with those holders. The management of each of the holders of these notes has indicated their ability to produce positive cash flow required to meet all repayment obligations under the notes; however, this assumes stable competitive and economic conditions. As at August 31, 2008, no one customer accounted for more than 10% of revenue; three customers each accounted for more than 10% of receivables. The aging of trade receivable balances as of August 31, 2008 was as follows: ------------------------------------------------------------------------- August 31, 2008 ------------------------------------------------------------------------- Not past due 15,048 Past due 0-30 days 5,820 Past due 31-60 days 602 Past due over 61 days 271 ------------------------------------------------------------------------- Trade receivables 21,741 Less allowance for doubtful accounts 160 ------------------------------------------------------------------------- 21,581 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (d) Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. The following are the undiscounted contractual maturities of financial liabilities as at August 31, 2008: ------------------------------------------------------------------------- Less than 1 to 2 After 1 year years 2 years ------------------------------------------------------------------------- Accounts payable and accrued liabilities 14,817 - - Long-term payable(*) - 1,179 1,179 ------------------------------------------------------------------------- 14,817 1,179 1,179 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) The short-term portion has been included in accounts payable and accrued liabilities. (e) Interest Rate Risk Interest rate risk is the risk that interest-bearing financial instruments will vary in value due to the variability of the interest rates. Since both the promissory notes and loan receivable have fixed interest rates, the Company is not exposed to any interest rate risk on these financial instruments. (f) Price Risk Price risk is the risk that the value of an investment will decline in the future. The Company currently holds investments in Nanoscience and CellPoint (note 12) both considered start-up technology companies with higher than average financial volatility due to the nature of the businesses. The price risks associated with these investments are managed through regular communications with senior management of those investments. 19. SEGMENTED INFORMATION As a result of the Company's leadership and product portfolio realignment at the end of 2007, the Company began operating and tracking its results in one reportable segment, consisting of numerous product areas, effective December 1, 2007. The Company's chief operating decision maker is considered to be its Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. The revenue by product portfolio within the single reportable segment and revenue by geographic area are as follows: Revenue by product portfolio is as follows: Three Months Ended Nine Months Ended August 31 August 31 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Analog Mixed Signal 26,726 22,815 75,348 64,325 Optical 3,504 2,675 12,840 7,601 IP Licensing 3,266 - 8,395 - ------------------------------------------------------------------------- 33,496 25,490 96,583 71,926 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue by principal markets is as follows: Three Months Ended Nine Months Ended August 31 May 31 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- United States 14,005 8,820 41,908 24,826 Europe 4,122 2,948 11,590 9,592 Pacific Rim 9,794 8,051 27,792 21,278 Canada 5,575 5,671 15,293 16,230 ------------------------------------------------------------------------- 33,496 25,490 96,583 71,926 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue is attributable to countries based upon the location of customers. Capital assets and goodwill per country are as follows: August November 31, 2008 30, 2007 ------------------------------------------------------------------------- Canada(*) 41,259 44,329 UK 1,020 1,028 Other 191 73 ------------------------------------------------------------------------- 42,470 45,430 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) Goodwill of $20,053 (November 30, 2007 - $ 19,393) is located in Canada. 20. OTHER INCOME (EXPENSE) Three Months Ended Nine Months Ended August 31 August 31 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Realized gains (losses) on foreign exchange hedge contracts (61) 480 710 203 Unrealized foreign exchange (losses) on other contracts - - - (76) Foreign exchange gains (losses) on translation 1,810 (232) 2,154 (613) ------------------------------------------------------------------------- Gain (losses) on foreign exchange, net 1,749 248 2,864 (486) Other expense (62) (101) (197) (174) ------------------------------------------------------------------------- 1,687 147 2,667 (660) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 21. INCOME TAXES Three Months Ended Nine Months Ended August 31 August 31 ------------------------------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Expected income tax expense using statutory tax rates 3,152 3,093 8,757 8,902 Permanent differences 140 57 400 102 Adjustment to final prior year tax liability - (65) - (65) Different income tax rates on earnings of foreign subsidiaries (49) 39 (95) 100 Changes in tax rates and other (206) 294 188 323 ------------------------------------------------------------------------- Provision for income taxes 3,037 3,418 9,250 9,362 ------------------------------------------------------------------------- Effective tax rate 32.3% 39.0% 35.4% 37.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- On December 13, 2007, the Government of Canada enacted a 1% decrease in the general federal corporate income tax rate for the calendar year 2008 from 20.5% to 19.5%, which resulted in a reduction in net future income tax assets and an increase in income tax expense of approximately $663 in the first quarter of 2008. 22. CAPITAL RISK MANAGEMENT The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a conservative capital structure. The Company's capital is composed of shareholders' equity, and is not subject to any capital requirements imposed by a regulator. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue or re-acquire shares, acquire or dispose of assets, and adjust the amount of cash and cash equivalents balances. 23. COMMITMENTS AND CONTINGENCIES The Company is committed to future minimum payments under operating leases for software design tools and buildings and equipment as at August 31, 2008 as follows: ------------------------------------------------------------------------- Buildings and Design Tools Equipment Total ------------------------------------------------------------------------- 2008 - 661 661 2009 1,950 2,197 4,147 2010 1,095 1,677 2,772 2011 1,094 1,338 2,432 2012 and beyond 1,642 16,549 18,191 ------------------------------------------------------------------------- 5,781 22,422 28,203 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has committed to approximately $10.9 million in purchase obligations as at August 31, 2008, of which $1.0 million is related to authorized capital projects including the implementation of the Company's new ERP system. The remaining purchase obligations relate primarily to inventory, product development and general operating costs. 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. 24. 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: Robin.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:
Gord.Currie@gennum.com

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