10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarterly period ended September 30, 2005

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission File Number 000-27843

Somera Communications, Inc.

(Exact name of registrant as specified in its charter)

Delaware	77-0521878
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

301 S. Northpoint Drive, Coppell, TX 75019

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (972) 304-5660

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 under the Act).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class	Outstanding at October 31, 2005
Common Stock, $0.001 par value	50,330,877

SOMERA COMMUNICATIONS, INC.

INDEX

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 (unaudited)	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Month Periods Ended September 30, 2005 and 2004 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2005 and 2004 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	32
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		34

2

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

SOMERA COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	September 30, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	3,426		$	7,654
Short-term investments		18,600			32,757
Accounts receivable, net of allowance for doubtful accounts of $454 and $574 at September 30, 2005 and December 31, 2004, respectively		17,379			16,217
Inventories, net		13,847			10,027
Other current assets		1,535			1,876
Total current assets		54,787			68,531
Property and equipment, net		4,109			4,600
Other assets		3,913			148
Goodwill		—			1,760
Intangible assets, net		—			50
Total assets	$	62,809		$	75,089
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,761		$	12,396
Accrued compensation		2,439			2,503
Other accrued liabilities		9,418			11,139
Deferred revenue		1,416			723
Total current liabilities		29,034			26,761
Commitments and Contingencies (Note 5)
Stockholders’ equity:
Preferred stock ($0.001 par value per share; authorized 20,000 shares, no shares issued)
Common stock ($0.001 par value per share; authorized 200,000 shares, shares issued and outstanding: 50,331 and 49,872 at September 30, 2005 and December 31, 2004, respectively)		50			49
Additional paid-in capital		75,230			74,652
Unearned stock-based compensation		(203	)		(72	)
Accumulated other comprehensive income (loss)		192			(191	)
Accumulated deficit		(41,494	)		(26,110	)
Total stockholders’ equity		33,775			48,328
Total liabilities and stockholders’ equity	$	62,809		$	75,089

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenues:
Equipment revenue	$	18,832		$	20,736		$	53,837		$	66,496
Service and program revenue		2,945			1,957			7,155			10,352
Total revenues		21,777			22,693			60,992			76,848
Cost of revenues:
Equipment cost of revenue		12,902			17,346			35,960			51,935
Service and program cost of revenue		1,683			1,455			3,882			7,554
Total cost of revenues		14,585			18,801			39,842			59,489
Gross profit		7,192			3,892			21,150			17,359
Operating expenses:
Sales and marketing		6,896			5,288			19,527			16,847
General and administrative		4,521			7,309			13,817			16,932
Impairment of goodwill		—			—			1,760			—
Other operating expenses		102			17			1,306			50
Total operating expenses		11,519			12,614			36,410			33,829
Loss from operations		(4,327	)		(8,722	)		(15,260	)		(16,470	)
Other income (expense), net		163			241			(87	)		91
Loss before income taxes		(4,164	)		(8,481	)		(15,347	)		(16,379	)
Income tax provision		13			8			37			42
Net loss		(4,177	)		(8,489	)		(15,384	)		(16,421	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(27	)		8			353			(2	)
Unrealized gain on investments		13			—			28			—
Comprehensive income (loss)	$	(4,191	)	$	(8,481	)	$	(15,003	)	$	(16,423	)
Net loss per share: basic and diluted	$	(0.08	)	$	(0.17	)	$	(0.31	)	$	(0.33	)
Weighted average shares: basic and diluted		50,301			49,808			49,973			49,695

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(15,384	)	$	(16,421	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		2,162			2,394
Provision for doubtful accounts		628			(98	)
Provision for excess and obsolete inventories		2,241			6,334
Amortization of stock-based compensation		70			33
(Gain) loss on disposal of assets		(219	)		318
Impairment of goodwill		1,760			—
Foreign exchange loss (gain)		699			(56	)
Changes in operating assets and liabilities:
Accounts receivable		(2,119	)		6,089
Inventories		(6,336	)		(4,933	)
Income tax receivable		—			6,781
Other current assets		158			494
Other assets		(418	)		—
Accounts payable		3,595			(2,123	)
Accrued compensation		(62	)		(1,156	)
Deferred revenue		728			(847	)
Other accrued liabilities		(1,658	)		882
Net cash used in operating activities		(14,155	)		(2,309	)
Cash flows from investing activities:
Purchase of other long term assets		(3,501	)		—
Acquisition of property and equipment		(1,471	)		(2,260	)
Proceeds from disposal of property and equipment		273			—
Purchase of short-term investments		(27,786	)		(37,561	)
Sale of short-term investments		41,970			24,601
Net cash provided by (used in) investing activities		9,485			(15,220	)
Cash flows from financing activities:
Proceeds from stock options exercises		247			729
Proceeds from employee stock purchase plan		129			232
Net cash provided by financing activities		376			961
Net decrease in cash and cash equivalents		(4,294	)		(16,568	)
Effect of exchange rate changes on cash and cash equivalents		66			(8	)
Cash and cash equivalents, beginning of period		7,654			30,642
Cash and cash equivalents, end of period	$	3,426		$	14,066

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1—Formation of the Company and Basis of Presentation:

Somera Communications, Inc. (“Somera” or “the Company”) was formed in August 1999 and is incorporated under the laws of the State of Delaware. The predecessor company was Somera Communications, LLC, which was formed in California in July 1995. In November 1999, the Company raised approximately $107 million in net proceeds from its initial public offering. Since that time, the Company’s common stock has traded on the Nasdaq National market under the symbol SMRA.

The Company’s fiscal quarters reported are the 13 or 14-week periods ending on the Sunday nearest to March 31, June 30, September 30 and December 31. For presentation purposes, the financial statements and notes have been presented as ending on the last day of the nearest calendar month. The third quarter of 2005 consisted of 13-weeks. The third quarter of 2004 consisted of 14-weeks.

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, all of which are recurring in nature, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet as of December 31, 2004 is derived from the audited financial statements as of and for the year then ended but does not include all notes and disclosures required by accounting principles generally accepted in the United States.

Certain amounts in prior periods have been reclassified to conform to the presentation adopted in the current fiscal year. Such reclassification did not impact earnings or total stockholders’ equity.

These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004.

Note 2—Summary of Significant Accounting Policies:

Revenue Recognition

The Company’s revenues are derived from the sale of new and re-used telecommunications equipment and equipment related services. With the exception of equipment exchange transactions, whereby equipment for one operator’s network is taken in exchange for other equipment, equipment revenue is recognized upon delivery by the Company provided that, at the time of delivery, there is evidence of a contractual arrangement with the customer, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no significant remaining obligations. Delivery occurs when title and risk of loss transfer to the customer, generally at the time the product is shipped to the customer.

The Company also generates service and program revenue, either in connection with equipment sales or through service only transactions. Revenue related to time and materials contracts is recognized as services are rendered at contract labor rates plus material and other direct costs incurred. Revenue on fixed price contracts is recognized using the percentage-of-completion method based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead, and allowable general and administrative expenses. These estimates are reviewed on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. The full amount of an estimated loss is charged to operations in the period it is determined that a loss will be realized from the contract. Revenue earned but not yet billed is included in other current assets in the accompanying condensed consolidated balance sheet. Unbilled receivables were $23,000 and $173,000 at September 30, 2005 and December 31, 2004, respectively. Revenue from services and programs represented approximately 13.5% and 8.6% of total revenue for the three month periods ended September 30, 2005 and September 30, 2004, respectively. Revenue from services and programs represented approximately 11.7% and 13.5% of total revenue for the nine month periods ended September 30, 2005 and 2004, respectively.

Revenue for transactions that include multiple elements such as equipment and services bundled together is allocated to each element based on its relative fair value (or in the absence of fair value, the residual method) and recognized when the revenue recognition criteria have been met for each element.

The Company manages contracts whereby the Company pays for services rendered by third parties as an agent for its customers. The Company passes these expenses through to customers, who reimburse the Company for the expenses plus a management fee. Typically, revenues related to these types of contracts include only management fees received from customers.

A reserve for sales returns and warranty obligations is recorded at the time of shipment and is based on the Company’s historical experience.

6

The Company supplies equipment to customers in exchange for re-used equipment or to customers from which re-used equipment was purchased under separate arrangements executed within a short period of time (“reciprocal arrangements”). For reciprocal arrangements, the Company considers Accounting Principles Board (“APB”) No. 29, “Accounting for Nonmonetary Transactions,” Emerging Issues Task Force (“EITF”) Issue No. 86-29, “Nonmonetary Transactions: Magnitude of Boot and Exceptions to the Use of Fair Value, Interpretation of APB No. 29, Accounting for Nonmonetary Transactions” and SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.” Revenue is recognized when the equipment received in accordance with the reciprocal arrangement is sold through to a third party. Revenues recognized under reciprocal arrangements were $12,000 and $94,000 for the three month period ended September 30, 2005 and 2004, respectively. For the nine-month period ended September 30, 2005, revenue recognized was $58,000, compared to $533,000 in the comparable period in 2004.

Research and Development

Research and development costs are charged to operations as incurred. Internal-use software development costs are accounted for in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). SOP 98-1 generally requires that software development costs be expensed as incurred until the application development stage is reached, at which point external development and certain direct internal costs are capitalized and, when the software is placed in service, amortized using the straight-line method over the estimated useful life, generally three years. The Company capitalized $290,000 of software development costs during January 2004 through September 2004, primarily consisting of salaries for employees directly related to the development of the Company’s general ledger inventory module interface and integration with its outside repair service computer module. The project was completed in 2004 and there were no internal capitalized software development costs during January 2005 through September 2005.

Stock-Based Compensation

The Company uses the intrinsic value method of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and its interpretations in accounting for its employee stock options. The Company amortizes stock based compensation arising from certain employee and non-employee stock option grants over the vesting periods of the related options, generally four years using the method set out in Financial Accounting Standards Board Interpretation No. 28 (“FIN 28”). Under the FIN 28 method, each vested tranche of options is accounted for as a separate option grant awarded for past services. Accordingly, the compensation expense is recognized over the period during which the services have been provided. This method results in higher compensation expense in the earlier vesting periods of the related options.

Pro forma information regarding net loss and net loss per share as if the Company recorded compensation expense based on the fair value of stock-based awards has been presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, and are as follows for the periods ended September 30, 2005 and 2004 (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss: as reported	$	(4,177	)	$	(8,489	)	$	(15,384	)	$	(16,421	)
Add: Stock-based employee compensation expensed in the financial statements		4			6			70			20
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards		(605	)		(608	)		(1,640	)		(1,501	)
Net loss: as adjusted	$	(4,778	)	$	(9,091	)	$	(16,954	)	$	(17,902	)
Net loss per share: basic and diluted as reported	$	(0.08	)	$	(0.17	)	$	(0.31	)	$	(0.33	)
Net loss per share: basic and diluted as adjusted	$	(0.10	)	$	(0.18	)	$	(0.34	)	$	(0.36	)

The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 “Accounting for Stock-based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, using the following assumptions:

	Employee Stock Option Plan				Employee Stock Purchase Plan
	2005		2004		2005		2004
Risk-free interest rate	4.03	%	3.60	%	3.51	%	1.57	%
Expected life (in years)	5		5		0.50		0.50
Dividend yield	0	%	0	%	0	%	0	%
Expected volatility	81	%	81	%	51	%	69	%

7

Employee stock awards include employee stock options. Common shares outstanding plus shares underlying stock-based employee awards totaled 58.9 million shares at September 30, 2005, compared to 59.5 million shares outstanding at September 30, 2004. The weighted average exercise price of outstanding stock options at September 30, 2005 and September 30, 2004 was $2.86 and $6.01, respectively. The weighted average fair value of stock awards granted during the three month periods ended September 30, 2005 and 2004 was $1.27 and $1.38, respectively. The weighted average fair value of stock awards granted during the nine month periods ended September 30, 2005 and 2004 was $1.39 and $1.71, respectively.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares and equivalent shares outstanding during the period. Equivalent shares, composed of shares issuable upon the exercise of options and warrants, are included in the diluted net loss per share computation to the extent such shares are dilutive. In the three and nine months ended September 30, 2005, there was no dilutive impact due to the recorded net loss.

Options to purchase 7,915,806 and 6,793,515 shares, respectively, of common stock have been excluded from the calculation of net loss per share, diluted for the three and nine month period ended September 30, 2005, and options to purchase 8,248,065 and 5,834,815 shares, respectively, of common stock have been excluded from the calculation of net loss per share, diluted for the three and nine month period ended September 30, 2004, as their effect would be anti-dilutive.

Note 3—Balance Sheet Accounts (in thousands):

	September 30, 2005			December 31, 2004
Inventories held for sale	$	18,977		$	15,620
Less: Reserve for excess and obsolete inventory		(5,130	)		(5,593	)
Inventories, net	$	13,847		$	10,027

During the nine months ended September 30, 2005, the Company disposed of $2.7 million of inventory that had previously been reserved. The Company did not receive any material proceeds from the disposals. The Company incurred charges for excess and obsolete inventory totaling $2.2 million during the nine months ended September 30, 2005.

	September 30, 2005		December 31, 2004
Other accrued liabilities:
Restructuring accrual (see Note 7)	$	90	$	288
Warranty reserve (see Note 6)		810		1,128
Income and other taxes payable		4,933		4,843
Other		3,585		4,880
	$	9,418	$	11,139

During 2005, the Company purchased $3.5 million of assets for our lifecycle management program. Since the Company has no near term plans to dispose of these assets through a sale during the next year, they have been classified as “Other assets” in the accompanying condensed consolidated balance sheet. Other assets also includes $500,000 which was used for a deposit on our new Execution and Distribution center in the Netherlands.

Note 4—Goodwill and Intangible Assets:

On October 17, 2000, the Company acquired all of the outstanding shares of MSI Communications, Inc. (“MSI”), a data networking equipment sales and services company. The purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition as determined by management. The excess of the purchase price over the fair value of the net identifiable assets was allocated to goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, the Company assesses the impairment of goodwill and other intangibles annually or whenever events or circumstances indicate that the carrying value may not be recoverable. Some factors the Company considers important which could result in an impairment review include the following: significant underperformance relative to projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends.

8

If the Company determines that the carrying value and other identified intangibles may not be recorded based upon the existence of one or more of the above indicators or impairment, the Company would typically measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business model.

During the second quarter of 2005, the Company completed its annual impairment analysis of goodwill as required under SFAS No. 142. Consistent with the annual impairment analysis conducted in 2003 and 2004, the Company utilized a discounted cash flow model to perform its annual impairment analysis of goodwill. The Company reviewed the estimated fair value of the New Equipment reporting unit based on the related discounted cash flows and compared the implied fair value to the carrying value of the reporting unit. As the carrying value exceeded the fair value of the reporting unit, the Company determined that the goodwill of approximately $1.8 million related to new equipment was impaired. Accordingly, the Company recorded an impairment charge of approximately $1.8 million in the second quarter of 2005. Factors that contributed to the Company’s conclusion to write down the goodwill related to the acquisition of the MSI assets included a significant decline in the Company’s revenues recognized from this reporting unit. In addition, based upon forecasts of projected revenue for this reporting unit, the Company did not believe the reporting unit would achieve acceptable revenue growth with respect to the New Equipment reporting unit. As of September 30, 2005, the Company had no remaining goodwill recorded.

The Company’s intangible assets consist of non-compete agreements and no triggering events per SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” have occurred during the quarter. The following is a summary of the Company’s intangible assets with finite useful lives at September 30, 2005 (in thousands):

2005

	Intangibles, net December 31, 2004		Accumulated Amortization			Intangibles, net September 30, 2005
Non-compete agreement	$	50	$	(50	)	$	—

Note 5—Commitments and Contingencies:

Until May 1, 2005, the Company maintained a credit facility of $4.0 million with Wells Fargo HSBC Trade Bank, which provided for issuances of letters of credit, primarily for procurement of inventory. The Company elected not to renew the credit facility when it expired on May 1, 2005. As of September 30, 2005 and December 31, 2004, the Company had no letters of credit outstanding. The Company had no long-term debt as of September 30, 2005 and December 31, 2004.

The Company is involved in legal proceedings with third parties arising in the ordinary course of business. Such actions may subject the Company to significant liability and could be time consuming and expensive to resolve. The Company is not currently a party to nor is aware of any such material litigation or other legal proceedings at this time that could materially impact the Company’s financial position, statement of operations, or liquidity.

The Company is currently being audited by federal, state and foreign taxing authorities. The outcome of these audits may result in the Company being assessed taxes in addition to amounts previously paid. Accordingly, the Company maintains tax contingency reserves for such potential assessments. The reserves are determined based upon the Company’s best estimate of possible assessments by the Internal Revenue Service (“IRS”) or other taxing authorities and are adjusted, from time to time, based upon changing facts and circumstances. During the second quarter of 2005, the IRS completed its fieldwork related to the audits of the Company’s consolidated federal income tax returns for the fiscal years 1999 through 2002. As a result of the IRS issuing its proposed audit adjustments related to the periods under examination, the Company reassessed its income tax contingency reserves to reflect the IRS findings and other current developments. While the overall net changes in these reserves was not significant, included in such changes was a $2.2 million reduction in reserves related to pre-IPO goodwill amortization and a $1.7 million increase in reserves related to inventory matters. The Company is currently in negotiations with the IRS regarding this federal tax liability.

Note 6—Warranties and Financial Guarantees:

Warranties:

The Company provides for future warranty costs for equipment sales upon product delivery. The specific terms and conditions of those warranties vary depending upon the product sold and country in which the Company does business. In general, the Company offers warranties that match the manufacturers’ warranty for that specific product. In addition, the Company offers a one-year warranty from the date of shipment for all equipment. The liability under these warranties is to repair or replace defective equipment. Longer warranty periods are sometimes provided in instances where the original equipment manufacturer warranty is longer or it is a requirement to sell to specific customer or market.

Factors that affect the Company’s warranty liability include historical and anticipated rates of warranty claims and cost per claim. Adequacy of the recorded warranty liability is reassessed every quarter and adjustments are made to the liability, if necessary.

9

Changes in the warranty liability, which is included as a component of “Other Accrued Liabilities” on the Condensed Consolidated Balance Sheet, during the period are as follows (in thousands):

	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004
Balance as of beginning of period	$	1,128		$	915
Provision for warranty liability		757			2,064
Settlements		(1,075	)		(1,567	)
Balance as of end of period	$	810		$	1,412

Financial Guarantees:

The Company occasionally guarantees contingent commitments through borrowing arrangements, such as letters of credit and other similar transactions. The term of the guarantee is equal to the remaining term of the related debt, which is short-term in nature. No guarantees or other borrowing arrangements exist as of September 30, 2005. If the Company enters into guarantees in the future, the Company will assess the impact under FASB Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

Note 7—Restructuring and Asset Impairment Charges:

At September 30, 2005, the accrued liability associated with a restructuring charge was $90,000 and consisted of the following lease obligations which expire in 2006 (in thousands):

	Balance at December 31, 2004		Payments		Balance at September 30, 2005
Lease obligations	$	288	$	198	$	90

Note 8—Segment Information:

The Company helps telecommunications operators buy and sell new and re-used equipment and provides equipment related services. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” operating segments are identified as components of an enterprise for which separate discrete financial information is available that is evaluated by the chief operating decision maker or decision making group to make decisions about how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. To date the Company has reviewed its operations in principally three segments comprised of New equipment, Re-used equipment, and Services and Programs. The chief operating decision maker assesses performance based on the gross profit generated by each segment.

10

The Company does not report operating expenses, depreciation and amortization, interest expense, capital expenditures or identifiable net assets by segment. All revenues disclosed below are generated from external customers. Segment information is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net revenue:
New equipment	$	4,722		$	4,946		$	12,563		$	15,213
Re-used equipment		14,110			15,790			41,274			51,283
Service and programs		2,945			1,957			7,155			10,352
Total	$	21,777		$	22,693		$	60,992		$	76,848
Gross profit:
New equipment	$	669		$	741		$	1,827		$	1,451
Re-used equipment		5,261			2,649			16,050			13,109
Service and programs		1,262			502			3,273			2,799
Total	$	7,192		$	3,892		$	21,150		$	17,359
Operating expenses:
Sales and marketing		6,896			5,288			19,527			16,847
General and administrative		4,521			7,309			13,817			16,932
Impairment of goodwill		—			—			1,760			—
Other operating expenses		102			17			1,306			50
Total operating expenses		11,519			12,614			36,410			33,829
Loss from operations		(4,327	)		(8,722	)		(15,260	)		(16,470	)
Other income (expense), net		163			241			(87	)		91
Loss before income taxes		(4,164	)		(8,481	)		(15,347	)		(16,379	)
Income tax provision		13			8			37			42
Net loss	$	(4,177	)	$	(8,489	)	$	(15,384	)	$	(16,421	)
Net revenue information by geographic area is as follows (in thousands):
	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net revenue:
United States	$	15,241		$	17,362		$	44,352		$	60,426
Canada		480			683			1,056			1,658
Latin America		1,186			206			2,207			2,339
Europe		4,736			3,660			12,059			10,402
Asia		79			782			1,070			1,463
Africa		44			0			188			560
Other		11			0			60			0
Total	$	21,777		$	22,693		$	60,992		$	76,848

Substantially all long-lived assets are maintained in the United States.

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Note 9—Recent Accounting Pronouncements:

In October 2004, the Emerging Issues Task Force (EITF) ratified its consensus on Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds”. EITF No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. In June 2005, the FASB ratified EITF Issue No. 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.” The consensus is effective for fiscal years ending after September 15, 2005, and will not affect the current presentation of the Company’s reportable operating segments.

The American Jobs Creation Act of 2004 (the “AJCA”) was signed into law on October 22, 2004. The AJCA contains numerous changes to U.S. tax law, both temporary and permanent in nature, including a potential tax deduction with respect to certain qualified domestic manufacturing activities, changes in the carryback and carryforward utilization periods for foreign tax credits and a dividend received deduction with respect to accumulated income earned abroad. The new law could potentially have an impact on the Company’s effective tax rate, future taxable income and cash and tax planning strategies, amongst other affects. In December 2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”), Application of FASB Statement No. 109, “Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” and Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. FSP 109-1 clarifies that the manufacturer’s tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. The Company is currently in the process of evaluating the impact that the AJCA will have on its financial position and results of operations. However, given the uncertainties and complexities of the repatriation provision and the Company’s continuing evaluation, it is not possible at this time to determine the amount that may be repatriated, if any or the related potential income tax effects of such repatriation.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred beginning January 1, 2006. The Company does not believe the adoption of SFAS No. 151 will have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.” SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement did not have a material effect on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which replaced SFAS No. 123 and superceded APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The Company is required to adopt SFAS No. 123R no later than January 1, 2006. Under SFAS No. 123R, The Company must determine the appropriate fair value method to be used for valuing share-based payments, the amortization method of compensation cost and the transition method to be used at the date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation cost be recorded for all unvested stock options and nonvested stock at the beginning of the first quarter of adoption of SFAS No. 123R, whereas the retroactive method requires recording compensation cost for all unvested stock options and nonvested stock beginning with the first period restated. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a material impact on its results of operations and earnings per share. The Company has not yet determined the method of adoption of SFAS No. 123R, or whether the amounts recorded in the consolidated statements of income in future periods will be similar to the current pro forma disclosures under SFAS No. 123.

In March 2005, the Securities and Exchange Commission released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.” SAB 107 provides the SEC’s staff position regarding the application of SFAS No. 123(R). SAB 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and SEC rules and regulations. SAB 107 outlines the significance of disclosures made regarding the accounting for share-based payments.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaced Accounting Principles Board Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Changes in Interim Financial Statements”. SFAS No. 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principles and changes required by a new accounting standard when the standard does not include specific transition provisions. Previous guidance required most voluntary changes in accounting principle to be recognized by including in net income of the period in which the change was made the cumulative effect of changing to the new accounting principle. SFAS No. 154 carries forward existing guidance regarding the reporting of the correction of an error and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of SFAS No. 154 is not expected to have a material impact on the Company’s consolidated financial statements except to the extent that the Company adopts a voluntary change in accounting principle in a future period that must be accounted for through a restatement of previous financial statements.

In June 2005, FASB issued FASB Staff Position (“FSP”) No. FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” to address the accounting for obligations associated with EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”). The Directive requires EU member countries to adopt legislation to regulate the collection, treatment, recovery and environmentally sound disposal of electrical and electronic waste equipment. Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced. Depending upon the law adopted by the particular country, upon replacement, the waste management obligation for that equipment may be transferred to the producer of the related equipment. The user retains the obligation if they do not replace the equipment.

FSP No. FAS 143-1 requires a commercial user to apply the provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” and related FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” to waste obligations associated with historical equipment. The rules require that a liability be established for the retirement obligation with an offsetting increase to the carrying amount of the related asset. FSP No. FAS 143-1 is effective the later of the first reporting period ending after June 8, 2005 or the date of adoption of the law by the applicable EU member country. The Company believes that the adoption of this FSP did not have a material effect on the Company’s financial position, results of operations or cash flows for those European Union (EU) countries that enacted the Directive into country-specific laws. The Company is currently evaluating the impact of applying this FSP in the remaining countries in future periods and does not expect the adoption of this provision to have a material effect on the Company’s financial position, results of operations or cash flows.

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

The discussion and analysis below contain trend analysis and other forward-looking statements regarding future revenues, cost levels, future liquidity and operations within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We may, from time to time, make additional written and oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below under “Certain Factors That May Affect Future Operating Results” and elsewhere in this Report as well as other factors discussed in our Form 10-K/A filed with the Securities and Exchange Commission on July 11, 2005 under the heading “Risk Factors.” We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Readers should carefully review the risk factors described in this Report and in other documents we file from time to time with the Securities and Exchange Commission.

The Business

We provide telecommunications asset management services to telecommunications carriers to help maintain and extend the life of legacy networks at lower costs. Our successful management of equipment lifecycles should enable our customers, primarily wireless and wireline carriers throughout the world, to concentrate on the introduction of new technologies. Somera supports their legacy networks through the sourcing, servicing, and liquidation of equipment on a more cost-effective basis thereby optimizing return on assets.

Our lines of business consist of the following four areas:

(1) Equipment brokerage: Our core transaction business where we sell a combination of new and refurbished equipment from a variety of manufacturers at significant savings off manufacturers’ new list prices.

(2) Somera RecoveryPLUS^™: A comprehensive repeatable program whereby we help carriers identify hidden value in their current under-utilized inventories to improve return on assets. Through this program, we catalog, assess and value these inventories and then develop a procurement and disposition strategy, which provides immediate measurable cash flow and expense relief to the carrier.

(3) Somera RepairPLUS: Services whereby we provide comprehensive repair and testing for wireless, wireline, and data products at significant savings and reduced cycle times.

(4) Somera LifecyclePLUS: A unique offering of customized operational, logistics, and technical services that enable carriers to outsource elements of network operations to drive down maintenance and operating expenses of mature technologies thereby enabling customers to focus more of their internal resources on core business strategies.

Somera RecoveryPLUS™, Somera RepairPLUS and Somera LifecyclePLUS are referred to as our lifecycle management programs.

Somera RecoveryPLUS^™ and Somera LifecyclePLUS are emerging lines of business for Somera Communications. Revenue from these new initiatives was $2.0 million of the $7.2 million of revenue included in Service and Program revenue during the nine months ended September 30, 2005.

Industry Background and Trends

Today’s business environment is transforming the way carriers are managing the equipment lifecycles of their legacy networks. This transformation is being fueled by the following trends in the telecommunications industry:

• A convergence of new technology that is expected to accelerate the displacement and transition of network equipment—from VoIP (voice over internet protocol) and its impact on circuit switching, edge and access devices, to GigE (Gigabit Ethernet) and its displacement of transport technologies such as SONET/SDH, to the continued broadband evolution of last mile technologies such as DSL, FTTP (fiber to the premises), and subsequent migration from 2G to 3G wireless technologies such as WIMAX, UMTS and CDMA2x;

• The acceleration of mergers and acquisitions in the telecommunications industry that will drive network redundancies, excess equipment inventories, and pressure to identify savings synergies;

• The competitive pressures to bring on new services and thereby lower the costs of legacy networks and preserve capital for investments in these new revenue producing services;

• The need to create consistent and stable processes to manage equipment assets, accelerated by the requirements of Sarbanes-Oxley Act compliance.

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As a result, carriers are seeking new strategies to more effectively manage equipment lifecycles and improve return on assets. Based on a report by the Tyler Group, an international consulting firm, we believe the addressable market capabilities required to support asset management within the telecommunications industry was approximately $9.0 billion as of 2004, growing to approximately $12.0 billion by 2007. We believe growth in this market is likely to be fueled by a desire by carriers to increase their focus on core competencies, lower capital and operating costs, reduce risk, improve return on assets, and manage current technologies in parallel with next generation implementation. Growth in this segment is based on a combination of service and equipment needs. Our opportunity to grow in this segment will require us to strengthen our services business to offer a complete equipment lifecycle management suite.

The Somera Strategy

Somera has worked with over 1,100 telecommunications carriers, providing asset management services to maintain and extend the life of legacy networks at a lower cost and optimize return on invested capital. Our core competencies in setting the market for equipment values and facilitating the transition to new technologies, our proprietary information technologies systems and workflows, and operational scale and certifications, combined with our position as a publicly traded company, should provide a distinct competitive advantage to make Somera a low risk, high return investment solution to our customers.

Our strategy is comprised of four separate but synergistic business areas: Equipment Brokerage, Somera RecoveryPLUS^™, Somera RepairPLUS, and Somera LifecyclePLUS.

A. Equipment Brokerage

The equipment brokerage business is the core transactional business that Somera was founded upon, providing new and refurbished equipment from a variety of manufacturers to carriers at significant savings typically ranging from approximately 25% to 60% off manufacturers’ list prices for new equipment. This allows our customers to make multi-vendor purchasing decisions from a single cost-effective source.

We offer carriers multiple categories of telecommunications infrastructure equipment to address their specific and changing equipment requirements, primarily for network maintenance and incremental network expansions. We support analog, T1/E1, T3/E3, SONET, SDH, TDMA, CDMA, and GSM for voice communications and WAN, LAN, international access servers, and various other data products for data communications. We have a database of over 14,000 different items from over 400 different manufacturers. Many of these items are either immediately available in our physical inventory or readily available from one of our supply sources, including carriers, resellers, and manufacturers. We offer to our customers many of the same terms and conditions of the original manufacturer’s warranty on all new equipment. On re-used equipment, we offer our own warranty which guarantees that the equipment will perform up to the manufacturer’s original specifications.

The new equipment we offer consists of telecommunications equipment primarily purchased directly from the original equipment manufacturer (“OEM”). The re-used equipment we offer consists primarily of equipment removed from the existing networks of telecommunications carriers, many of whom are also our customers. Our sources for re-used equipment are typically the original owners of such equipment, or resellers of such equipment and either the carrier, another third party, or a Somera trained professional removes the equipment from the network on behalf of the carrier.

Substantially all of our equipment sourcing activities are made on the basis of purchase orders rather than long-term agreements. Although we seek as part of our equipment resource planning to establish strategic contract relationships with operators, we anticipate that our operating results for any given period will continue to be dependent, to a significant extent, on purchase order based transactions.

B. Somera RecoveryPLUS^™

Somera RecoveryPLUS^™ is a new program launched in the fourth quarter 2004 that leverages Somera’s strength in the valuation and disposition of excess and under-utilized inventories. RecoveryPLUS^™ helps carriers recover hidden value from these assets by either redeploying them back into the carriers’ network, thereby reducing the reliance on new equipment purchase for legacy network maintenance or remarketing these assets on the secondary market thereby generating a new source of capital to offset the expense of other equipment and services purchases. As a result, carriers are provided with immediate cash flow and expense relief and a more optimized return on assets.

The identification, valuation, and disposition of excess inventories is not a core competency of our customers. Although they may have traditionally relied on the OEM to handle excess assets, carriers have come to recognize the need for a vendor-agnostic, single source who can aggregate the diverse technologies and manufacturers that reside in the network and who in turn, can develop and execute a strategy that will optimize the return on theses assets.

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The basic execution of a RecoveryPLUS^™ program consists of dispatching Somera personnel to the carriers’ warehouses to discover and catalog under-utilized assets, build a database of this information, value the equipment, and develop a strategic framework for the disposition or redeployment of the equipment, including procurement of required equipment that the carrier does not have in inventory. The program is managed by a Somera Asset Manager (or “SAM”) that can be co-located inside the carriers’ organization and serves as the central point of contact dedicated to executing a RecoveryPLUS^™ program.

The metrics we use for valuation of inventory are based on the data that we capture in our proprietary global database known as COMPASS. The database consists of product information and its respective market value, the installed technology base within our customers’ networks, plans for network build-out and de-installation, and demand and supply of equipment on the secondary market. The data domiciled within our database and applied to the valuation and marketability process is captured primarily through our sales and purchase transactions and interactions with customers. The data is interpreted by our internal sales and supply groups.

For those equipment assets identified for disposition, we offer the following programs:

• Consignment. In the consignment program, we do not take title to the equipment, but rather the supplier of the equipment, typically the telecommunications operators, retains title and generally stores the excess inventory in our warehouse. Our sales force then promotes the sale of the consigned equipment into our network of customers and prospects. Net proceeds from the consigned sales are shared with the supplier of the equipment on negotiated terms.

• Direct Purchase. In the direct purchase program, we purchase equipment from the carrier directly through cash payment.

• Equipment Disposal. In the equipment disposal program, we provide support to customers to dispose of equipment that is no longer marketable and should be scrapped in a manner that complies with environmental regulations.

C. Somera RepairPLUS

Somera RepairPLUS supports our customers’ requirements for a high level of quality and reliability and a lower cost of ownership to address the demands of legacy network maintenance. Traditionally, carriers have relied on the original equipment manufacturer (OEM) to repair equipment. However, as OEMs have experienced staff reductions as a result of the telecommunications industry downturn, they have redirected more of their internal resources to their core competencies of new technology development and installation. Additionally, OEMs are outsourcing the manufacturing of product to third parties whose business model does not support the timely and cost-effective repair of equipment. As a result, carriers have experienced higher costs and longer turnaround times, which drives up the cost of network maintenance and increases the potential risk of revenue loss from network downtime. Therefore, we believe the opportunity exists to provide repair support that delivers cost savings, and faster turnaround times and mitigates risk to the carrier.

The Somera RepairPLUS capabilities include the repair and testing of a broad range of wireless, wireline, and data products and technologies. We have the ability to test products in-house or outsource with certified partners. Our repair and testing facilities are certified to ISO 9000:2001 and TL9000 standards representing our clear commitment to quality. In-house repair is conducted at our Execution and Deployment Center in Coppell, Texas.

D. Somera LifecyclePLUS

Somera LifecyclePLUS is a unique suite of operational, logistics, and technical services that enable operators to outsource elements of their network operations to drive down maintenance and operating costs of legacy networks. These services can be customized to meet the unique requirements of the customer and include logistics management, custom configurations, installation/de-installation, spares management, and end-of-life management. We execute our LifecyclePLUS services strategy through a combination of internal expertise and outsourced services. Services are performed at our Execution and Deployment Center in Coppell, Texas. For the Europe, Middle East, and Africa (“EMEA”) region, services are managed at our facility in Amsterdam, The Netherlands.

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Somera LifecyclePLUS services include the following:

• Logistics Management: We provide complete outsource logistics support for inventory management including barcoding, warehousing, tracking and reporting, and shipment based on the customers’ defined schedule.

• Custom Configurations: We provide custom configurations to help operators deploy new technologies or redeploy existing equipment assets. Our services include unique engineered solutions to customer-defined configurations, “rack-n-stack” and kitting and staging, testing and verification to specifications, and ancillary equipment procurement.

• Installation/De-Installation: Oftentimes under-utilized equipment assets need to be de-installed and then installed as part of the redeployment process. We provide project management, field supervision, certified technicians, and required logistics and materials management support to complement this offering.

• Spares Management: Maintaining access to readily available spare parts is critical to reducing network downtime. Our services support carriers’ needs to have a reliable, available source for network spares. Spares can either be inventoried on behalf of the carrier or procured on the market based on demand and usage by the customer.

• End-of-Life management: Somera works with carriers and OEMs to help them plan for the ultimate end-of-life of mature technologies in the network. We support this process with asset acquisition, spares maintenance, repair, and asset consolidation and planning at minimum required stocking levels.

Our ability to execute the core offerings of Equipment Brokerage, RecoveryPLUS^™, RepairPLUS, and LifecyclePLUS is grounded in three key areas:

• Operational Excellence: We have established a 259,000 square foot Execution and Deployment Center in Coppell, Texas which enables us to support and integrate over 400 different types of manufacturer technologies in addition to testing, repair, and refurbishment of equipment to meet high quality and uptime standards. Our operations support both high volume and transactional parts fulfillment to the delivery of custom-engineered solutions. We have achieved certification to ISO 9001:2000 and TL9000 standards for this facility. In addition, we are working to establish a comparable level of operational competencies in Europe to effectively support customers in that region.

• Program Leadership: Our intellectual capital in proprietary technology information systems and market knowledge of equipment demand, values and customer networks, enables us to develop leading programs to improve return on capital. We have built a proprietary global database of customers, networks, and equipment comprised of over 14,000 different items, from over 400 different manufacturers, spanning a decade of customers’ strategic and transactional requirements. This provides unique capabilities to locate equipment customers’ need at reasonable prices, while helping us to determine the market value and financial return on equipment. Our operations in Europe further enhance our knowledge and expertise of technologies based on different standards and manufacturer offerings available outside of North America. When combined with Somera’s cash position, we believe we can negotiate deals that give us access to the right equipment, at the right time, at the right price.

• Customer Service: Our strategy is built on a highly integrated model that combines sales, logistics, and support to seamlessly connect with our customers to accelerate sales and build brand and customer loyalty. Our strategy to execute this important goal includes building our e-presence with Somera.com, creating a more effective 1-866-SOMERA1 customer service line and support programs, as well as offering to support the immense technology transition that is occurring in the network. With purchasing decisions being made or influenced by many levels and departments within an operator’s network, our teams are trained to address the various technical and financial requirements to gain a greater share of capital expenditures.

Somera’s business strategy supports the critical elements to lead the secondary market in the Americas, EMEA and Asia Pacific regions.

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Results of Operations

The following table sets forth, for the period indicated, income statement data expressed as a percentage of net revenue.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Revenues:
Equipment revenue	86.5	%	91.4	%	88.3	%	86.5	%
Service and program revenue	13.5		8.6		11.7		13.5
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Equipment cost of revenue	59.2		76.4		59.0		67.6
Service and program cost of revenue	7.7		6.4		6.4		9.8
Total cost of revenues	66.9		82.8		65.4		77.4
Gross profit	33.1		17.2		34.6		22.6
Operating expenses:
Sales and marketing	31.7		23.3		32.0		21.9
General and administrative	20.7		32.2		22.7		22.0
Impairment of goodwill	—		—		2.9		—
Other operating expenses	0.5		0.1		2.1		0.1
Total operating expenses	52.9		55.6		59.7		44.0
Loss from operations	(19.8	)	(38.4	)	(25.1	)	(21.4	)
Other income (expense), net	0.8		1.0		(0.1	)	0.1
Loss before income taxes	(19.0	)	(37.4	)	(25.2	)	(21.3	)
Income tax provision	0.1		0.0		0.1		0.1
Net loss	(19.1	)%	(37.4	)%	(25.3	)%	(21.4	)%

Equipment Revenue. Our equipment revenue consists of sales of new and re-used telecommunications equipment, including switching, transmission, wireless, data, microwave and power products, net of estimated provisions for returns. A substantial portion of our revenue is derived from sales to domestic telecommunications wireline and wireless carriers. Equipment revenue decreased 9.2% to $18.8 million in the three months ended September 30, 2005 from $20.7 million in the three months ended September 30, 2004.

Equipment revenue from customers in the United States decreased 20.2% to $12.3 million in the three months ended September 30, 2005 from $15.4 million in the three months ended September 30, 2004. This decrease in equipment revenue from customers in the United States was attributable to increased competition and our management re-organization in the sales and supply management organizations that occurred in the first half of the year and has continued to impact our execution in the United States. International equipment revenues increased 22.6% to $6.5 million in the three months ended September 30, 2005 compared to $5.3 million in the same quarter the previous year due primarily to continued focus on driving international business, primarily in Europe. In addition, we experienced relative stability in our sales and supply management organization in our European office.

Equipment revenue attributable to new equipment sales decreased 4.5% to $4.7 million in the three months ended September 30, 2005 from $4.9 million in the three months ended September 30, 2004. Equipment revenue attributable to re-used equipment sales decreased 10.6% to $14.1 million in the three months ended September 30, 2005 from $15.8 million in the three months ended September 30, 2004. These decreases in equipment revenue were attributable to increased competition and our management re-organization in the United States.

Equipment revenue decreased 19.0% to $53.8 million in the nine months ended September 30, 2005 from $66.5 million in the ninemonths ended September 30, 2004. Equipment revenue from customers in the United States decreased 25.7% to $37.2 million in the nine months ended September 30, 2005 from $50.1 million in the nine months ended September 30, 2004. This decrease in equipment revenue from customers in the United States was attributable to increased competition, and our management re-organization in the sales and supply management organizations and employee turnover that occurred in the first half of 2005 and has continued to impact our execution. Equipment revenue from customers outside the United States increased slightly to $16.6 million in the nine months ended September 30, 2005 from $16.4 million in the nine months ended September 30, 2004.

Revenue from new equipment sales declined 17.4%, or $2.7 million from $15.2 million to $12.6 million and revenue from re-used equipment sales declined 19.5% or $10.0 million from $41.3 million for the nine-month period ended September 30, 2005 compared to $51.3 million in the same period in 2004. These declines in equipment revenue year over year were primarily due to increased competition, as well as our management re-organization in the United States.

Service and Program Revenue. Service and program revenue is primarily derived from repair contracts and lifecycle management programs. Service and program revenue increased 50.5% to $2.9 million in the three months ended September 30, 2005 from $2.0 million in the three months ended September 30, 2004. Service and program revenue comprised 13.5% of total revenues in the third quarter of 2005 compared to 8.6% of total revenues in the third quarter of 2004. The increase in revenue levels and the increase in service and program revenue as a percentage of total revenue was impacted by our successful implementation of new lifecycle management programs in the third quarter of 2005.

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Service and program revenue decreased to $7.2 million for the nine months ended September 30, 2005 from $10.4 million for the nine months ended September 30, 2004. The decline in overall service and program revenues in 2005 reflects our decision in the fourth quarter of 2003 to reduce the amount of low-margin, low-value-added services products. We remained obligated under some of these contracts into 2004. This decrease was partially offset by an increase due to our implementation of new lifecycle management programs in the third quarter of 2005.

Equipment Gross Profit. Equipment gross profit as a percentage of equipment revenue, or gross margin, was 31.5% in the three months ended September 30, 2005, up from 16.3% in the three months ended September 30, 2004. Gross profit on re-used equipment was $5.3 million, or 37.3% of re-used equipment revenue in the three months ended September 30, 2005 compared to $2.6 million or 16.8% of re-used equipment revenue in the three months ended September 30, 2004. Gross profit on new equipment sales in the three months ended September 30, 2005 was $669,000, or 14.2% compared to $741,000, or 15.0% in the three months ended September 30, 2004. The increase in equipment gross margin in the quarter ended September 30, 2005 was primarily due to focusing our efforts on higher value inventory purchases and sales opportunities in the re-used equipment market. In addition, gross margin in the three months ended September 30, 2004 was unusually low due to a $2.5 million transaction with a strategic national wireless carrier in the first quarter of 2004 that was completed in the third quarter of 2004 at no gross profit. Sourcing constraints at that time caused us to deliver new equipment instead of re-used equipment to meet the customer’s schedules, resulting in lower overall margins. Finally, we recorded a $2.9 million charge related to excess and obsolete inventory during the quarter ended September 30, 2004, compared to a provision of $898,000 in the third quarter of 2005. The higher provision in the third quarter of 2004 was related to a higher level of inventory whose market value was less than inventory cost.

Gross margins increased to 33.2% for the nine months ended September 30, 2005, compared to 21.9% in the nine months ended September 30, 2004. Gross margin attributable to new equipment sales increased to 14.5% in the nine months ended September 30, 2005 compared to 9.5% in the nine months ended September 30, 2004. Gross margin attributable to re-used equipment sales increased to 38.9% in the nine months ended September 30, 2005 from 25.6% in the nine months ended September 30, 2004. The increase in gross margin was primarily related to focusing our efforts on higher value inventory purchases and sales opportunities in the re-used equipment market. Additionally, in the first quarter of 2004 we completed a large transaction with a strategic national wireless carrier at no gross profit, resulting in lower re-used equipment gross margins in the first quarter of 2004. Additionally, margins in the nine month period ended September 30, 2005 were favorably impacted by provisions for excess and obsolete inventories which decreased $4.1 million to $2.2 million for the nine months ended September 30, 2005 from $6.3 million in the nine months ended September 30, 2004. The higher provision in 2004 was related to a higher level of inventory whose market value was less than the inventory cost.

Service and Program Gross Profit. Gross profit as a percentage of service and program revenue increased to 42.9% for the three months ended September 30, 2005 compared to 25.7% for the three months ended September 30, 2004. The increase in gross profit on service and program revenue was primarily attributable to a shift away from certain lower margin repair services, as a direct result of our decision to exit such lower margin business in the fourth quarter of 2003. We remained obligated under some of these contracts into 2004. The increase in gross profit was also impacted by our new lifecycle management programs, which generally carry higher margins.

Gross profit as a percentage of service and program revenue increased to 45.7% in the nine months ended September 30, 2005, compared to 27.0% in the nine months ended September 30, 2004. The increase in gross profit on service and program revenue was primarily attributable to our decision in the fourth quarter of 2003 to shift away from certain low-margin services as previously discussed. . We remained obligated under some of these contracts into 2004. The increase in gross profit was also impacted by our implementation of new lifecycle management programs in the third quarter of 2005, which generally carry higher margins.

Sales and Marketing. Sales and marketing expenses consist primarily of sales personnel salaries, commissions and benefits, costs for marketing support to establish the Somera brand and augment sales strategies as well as costs associated with sales and marketing materials and promotions. Sales and marketing expenses increased to $6.9 million or 31.7% of net revenue in the three months ended September 30, 2005, from $5.3 million or 23.3% of net revenue in the comparable period in 2004. The increase in sales and marketing expense of 30.4%, or $1.6 million in the third quarter of 2005 compared to the same period last year was primarily due to $1.3 million in increased compensation expense as we continued to staff our sales force. The increase in compensation expense included an increase of $523,000 in commission expense as a result of higher margins on which we pay commission in the third quarter of 2005 as compared to the third quarter of 2004. We also experienced higher facility related expenses of approximately $140,000 and higher third party international sales consulting expenses of approximately $60,000 as we increased our international business.

Sales and marketing expenses increased to $19.5 million or 32.0% of net revenue for the nine months ended September 30, 2005, from $16.8 million or 21.9% of net revenue in the comparable period in 2004. The primary reason for this increase was due to increased payroll and benefits expense of $1.2 million as we continued to staff our sales force. We also incurred an increase in consulting expense of $382,000 in conjunction with an increased emphasis on growing our international business in the current year. In addition, rent expense increased $233,000 due to costs incurred during the period for our new facility in The Netherlands. Health insurance costs increased $194,000, marketing expense increased $170,000, travel expense increased $153,000, and outside labor increased $137,000. The increase in these costs was a result of greater focus on increasing our revenue and gross margin in the current period.

General and Administrative. General and administrative expenses consist principally of facility costs including distribution and technical operations, salary and benefit costs for executive and administrative personnel, and professional fees. General and administrative expenses decreased to $4.5 million or 20.8% of net revenue in the three months ended September 30, 2005, from $7.3 million or 32.2% of net revenue in the comparable period in 2004. This decrease in general and administrative expenses of $2.8 million was primarily related to a decrease of $1.3 million in salary and related expenses. The decrease in salary expense was due to a staffing reduction in administrative infrastructure personnel as we reduced support personnel as our revenue has decreased from period to period. The decrease in general and administrative expenses was also due to a decrease in consulting expense of $687,000 due to lower costs incurred in conjunction with Sarbanes Oxley compliance. Facility related expenses were lower by $357,000, which included lower depreciation expense of $184,000 and lower general insurance expense of $106,00 in the current quarter as compared to the same quarter in prior year. Depreciation expense was lower due to a lower asset base as of September 30, 2005 as compared to September 30, 2004. Insurance expense was lower due to improved policy negotiations on our current policy. Finally, the quarter ended September 30, 2004 included a loss on disposal of assets of $318,000.

General and administrative expenses decreased to $13.9 million or 22.7% of net revenue for the nine months ended September 30, 2005, from $16.9 million or 22.0% of net revenues in comparable period in 2004. The decrease of 22.5% or $3.1 million included a decrease of salary and related expenses of $1.7 million due to a staffing reduction in administrative infrastructure personnel as we reduced support personnel as our revenue has declined from period to period. In addition, moving expense was $341,000 lower, depreciation expense was $334,000 lower, general insurance expense was $308,000 lower, legal expense was $241,000 lower, rent expense was $215,000 lower and travel expense was $185,000 lower in the nine months ended September 30, 2005 as compared to the same period of 2004. These cost reductions were a result of a concentrated effort to lower our general and administrative costs to more closely align to the lower revenue being generated by the Company. Finally, the nine months ended September 30, 2004 included a loss on disposal of assets of $318,000 compared to a gain of $219,000 on the disposal of assets for the same nine month period ended September 30, 2005.

Impairment of Goodwill. During the second quarter of 2005, we completed our annual impairment analysis of goodwill as required under SFAS No. 142. Consistent with the annual impairment analysis conducted in 2003 and 2004, this analysis considered the estimated fair value of the Company’s New Equipment reporting unit based on the related discounted cash flows. We determined that the carrying value of the reporting unit exceeded its fair value. Accordingly, we compared the implied fair value of the reporting unit’s goodwill with its carrying value and recorded an impairment charge of approximately $1.8 million in the second quarter of 2005. Factors that contributed to our conclusion to write down the goodwill related to the acquisition of the MSI assets included a significant decline in our revenues

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recognized from this reporting unit. In addition, based upon our forecasts, we did not believe that we would achieve acceptable revenue growth with respect to the New Equipment reporting unit. We had previously written off goodwill associated with our Re-Used Equipment and Services units in the second quarter of 2003 that related to our past acquisition of the assets of Compass Telecom. As of September 30 2005, we had no remaining goodwill recorded.

Other Operating Expense. In the third quarter of 2005, other operating expenses included $17,000 in amortization of intangible assets as well as other miscellaneous charges.

Other Operating Expense for the nine month period ended September 30, 2005 included recognition of $749,000 of expenses associated with due diligence and other costs related to a prospective acquisition that we chose not to complete. We also incurred $506,000 in expense related to outstanding sales taxes from 2001, 2002 and 2003.

Other Income (Expense), Net. Other income (expense), net, consists of investment earnings on cash and cash equivalent balances and realized foreign currency gains/(losses). Other income (expense) net, decreased to income of $163,000 in the three months ended September 30, 2005 from income of $241,000 in the three months ended September 30, 2004. The decrease of $78,000 in other income for the three months ended September 30, 2005 compared to the three months ended September 30, 2004 is due to an unfavorable foreign exchange rate impact of approximately $193,000, partially offset by an increase of approximately $115,000 in interest income due to higher rates of return on our investments.

Other income (expense) net, decreased to an expense of $87,000 for the nine months ended September 30, 2004 from an income of $91,000 in the comparable period in 2004. The decrease of $178,000 for the nine months ended September 30, 2005 compared to the same period last year, is due to an unfavorable foreign exchange rate impact of approximately $359,000, partially offset by an increase in interest income of $181,000 due to higher rates of return on our investments.

Income Tax Provision. Income tax provision for the three and nine month periods ended September 30, 2005 totaled $13,000 and $37,000, respectively, compared to $8,000 and $42,000, for the comparable periods of the prior year. These amounts represent estimates of taxes due on income earned by our foreign subsidiaries. The income tax benefit generated by our losses in North America was offset by a valuation allowance. Under U.S. GAAP, we must establish valuation allowances against our deferred tax assets if it is determined that it is more likely than not that these assets will not be recovered. In assessing the need for a valuation allowance, both positive and negative evidence must be considered. It was determined that our cumulative losses reported since 2002 represented significant negative evidence which required a full valuation allowance as of September 30, 2005.

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Liquidity and Capital Resources

Our principal source of liquidity is our cash and cash equivalents and short-term investments. Our cash and cash equivalents balance was $3.4 million at September 30, 2005 and $7.7 million at December 31, 2004 and our short-term investments balance at September 30, 2005 and December 31, 2004 was $18.6 million and $32.8 million, respectively.

Net cash used by operating activities for the nine months ended September 30, 2005 was $14.2 million. The primary use of operating cash was the reported net loss of $15.4 million for the nine months ended September 30, 2005, which was partially offset by non-cash charges comprised of a $2.2 million provision for excess and obsolete inventories, depreciation and amortization charges of $2.2 million, the impairment of $1.8 million in goodwill, foreign exchange loss of $699,000 and provision for doubtful accounts of $628,000. Items negatively impacting our operating cash flow included an increase in inventory of $6.3 million, an increase in accounts receivable of $2.1 million, and a decrease of $1.7 million in other accrued liabilities. The increase in accounts receivable was due to the timing of revenue transactions during the third quarter of 2005. The increase in inventory was primarily the result of increased purchases of inventory to drive future revenue. The decrease in other accrued liabilities was primarily due to the payout of accrued accounting and Sarbanes-Oxley implementation expenses for 2004 paid out in the first part of 2005. Items positively impacting our operating cash flow included an increase in accounts payable of $3.6 million and an increase in deferred revenue of $728,000. The increase in accounts payable is attributable to our increase in inventory.

Net cash used by operating activities for the nine months ended September 30, 2004 was $2.3 million. The primary use of operating cash was the reported net loss of $16.4 million for the nine months ended September 30, 2004, which was offset by non-cash charges of $6.3 million provision for excess and obsolete inventories and depreciation and amortization charges of $2.4 million. Significant sources of operating cash flows included a decrease in accounts receivable of $6.1 million and a decrease in inventory of $5.0 million. The decrease in accounts receivable was primarily due to decreasing revenue. Offsetting these operating cash flows was a $2.1 million decrease in accounts payable, a $1.2 million decrease in accrued compensation, and an $847,000 decrease in deferred revenue. The decrease in income tax receivable results from a tax refund of $6.8 million that was received in the third quarter of 2004.

Net cash provided by investing activities for the nine months ended September 30, 2005 includes $3.5 million of purchases of assets for our lifecycle management program which will be used to drive future revenue. Net cash provided by investing activities also includes purchase of property and equipment of $1.5 million and purchase of short-term investments of $27.8 million, offset by $42.0 million in proceeds from sale of short term investments and disposals of property and equipment of $273,000. Net cash provided by investing activities for the nine months ended September 30, 2004, includes purchases of property and equipment of $2.3 million, purchase of short-term investments of $37.6 million, and sale of short-term investments of $24.6 million.

Cash flows from financing activities for the nine months ended September 30, 2005 included proceeds from stock option exercises of $247,000 and proceeds from employee stock purchases of $129,000. Cash flows from financing activities for the nine months ended September 30, 2004, included proceeds from stock option exercises of $729,000 and proceeds from employee stock purchases of $232,000.

We do not currently plan to pay dividends, but rather plan to retain future earnings for use in the operation of our business and to fund future growth. We had no long-term debt outstanding as of September 30, 2005.

Our current business plan for 2006 does not reflect any need for additional capital. We do not believe we require outside funding. However, should we need additional capital outside our normal operating requirements, we believe that since we have a strong current ratio and no long-term debt outstanding on our consolidated balance sheet, we will be in the position to utilize our assets to seek additional capital.

Additionally, on October 31, 2005, the Nasdaq Stock Market Inc. (“Nasdaq”) issued us a notice that we were not in compliance with Nasdaq Marketplace Rule 4450(a)(5) (the “Minimum Bid Price Rule”) because, as of the date of the notice, the bid price of our common stock had closed below the minimum $1.00 per share for 30 consecutive business days. We must regain compliance with this Nasdaq rule by May 1, 2006 (or such longer period of time as may be required by Nasdaq, in its discretion), or our common stock will be de-listed from the Nasdaq National Market. We cannot give assurance that we will be able to maintain the listing of our common stock on the Nasdaq National Market in the future. If we are delisted from the Nasdaq National Market, we will apply to be listed on the Nasdaq Capital Market or the OTC bulletin board. Even if we are able to regain compliance for the Nasdaq National Market, this notice and potential movement to a new exchange may also impact our ability to raise additional capital if needed.

The following summarizes our contractual obligations under various operating leases for both office and warehouse space as of September 30, 2005, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. The remaining lease terms range in length from one to seven years with future minimum lease payments, net of estimated sublease income of $60,000, for the three months ending December 31, 2005, as follows (in thousands):

	Three Months Ending December 31, 2005		2006		2007		2008		2009		Thereafter
Gross restructuring related leases (see Note 7)	$	68	$	22	$	—	$	—	$	—	$	—
Operating Leases		626		2,016		1,973		1,995		1,929		2,937
Total commitments	$	694	$	2,038	$	1,973	$	1,995	$	1,929	$	2,937

Under the terms of the lease agreements, we are also responsible for internal maintenance, utilities and a proportionate share (based on square footage occupied) of property taxes. In the third quarter of 2005, we funded our international operation with $500,000, which was used for a deposit on our new Execution and Distribution center in the Netherlands. This deposit is classified as “Other Assets” in the accompanying condensed consolidated balance sheet.

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We anticipate fluctuations in working capital in the future primarily as a result of fluctuations in sales of equipment and relative levels of inventory.

We believe that cash, cash equivalents, short-term investments and anticipated cash flow from operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.

Commitments

Until May 1, 2005, we maintained a credit facility of $4.0 million with Wells Fargo HSBC Trade Bank, which provided for issuances of letters of credit, primarily for procurement of inventory. We elected not to renew the credit facility when it expired on May 1, 2005. As of September 30, 2005 and December 31, 2004, we had no letters of credit outstanding. We had no long-term debt as of September 30, 2005 and December 31, 2004.

Contingencies

We have in the past, and may hereafter, be involved in legal proceedings and litigation with third parties arising in the ordinary course of business. Such actions by third parties may subject us to significant liability and could be time consuming and expensive to resolve. We are not currently a party to or aware of any such litigation or other legal proceedings that could materially harm our business.

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Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2004 Annual Report on Form 10-K/A filed on July 11, 2005, in the Notes to the Consolidated Financial Statements, Note 2, and the Critical Accounting Policies section.

Accounting Pronouncements

In October 2004, the Emerging Issues Task Force (EITF) ratified its consensus on Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds”. EITF No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. In June 2005, the FASB ratified EITF Issue No. 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.” The consensus is effective for fiscal years ending after September 15, 2005, and will not affect the current presentation of our reportable operating segments.

The American Jobs Creation Act of 2004 (the “AJCA”) was signed into law on October 22, 2004. The AJCA contains numerous changes to U.S. tax law, both temporary and permanent in nature, including a potential tax deduction with respect to certain qualified domestic manufacturing activities, changes in the carryback and carryforward utilization periods for foreign tax credits and a dividend received deduction with respect to accumulated income earned abroad. The new law could potentially have an impact on our effective tax rate, future taxable income and cash and tax planning strategies, amongst other affects. In December 2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”), “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” and Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. FSP 109-1 clarifies that the manufacturer’s tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. We are currently in the process of evaluating the impact that the AJCA will have on our financial position and results of operations. However, given the uncertainties and complexities of the repatriation provision and our continuing evaluation, it is not possible at this time to determine the amount that may be repatriated, if any or the related potential income tax effects of such repatriation.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for inventory costs incurred beginning January 1, 2006. We do not believe the adoption of SFAS No. 151 will have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.” SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement did not have a material effect on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which replaced SFAS No. 123 and superceded APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. We are required to adopt SFAS No. 123R no later than January 1 2006. Under SFAS No. 123R, we must determine the appropriate fair value method to be used for valuing share-based payments, the amortization method of compensation cost and the transition

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method to be used at the date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation cost be recorded for all unvested stock options and nonvested stock at the beginning of the first quarter of adoption of SFAS No. 123R, whereas the retroactive method requires recording compensation cost for all unvested stock options and nonvested stock beginning with the first period restated. We are evaluating the requirements of SFAS No. 123R and expect that the adoption of SFAS No. 123R will have a material impact on our results of operations and earnings per share. We have not yet determined the method of adoption of SFAS No. 123R, or whether the amounts recorded in the consolidated statements of income in future periods will be similar to the current pro forma disclosures under SFAS No. 123.

In March 2005, the Securities and Exchange Commission released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.” SAB 107 provides the SEC’s staff position regarding the application of SFAS 123(R). SAB 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and SEC rules and regulations. SAB 107 outlines the significance of disclosures made regarding the accounting for share-based payments.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaced Accounting Principles Board Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Changes in Interim Financial Statements”. SFAS No. 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principles and changes required by a new accounting standard when the standard does not include specific transition provisions. Previous guidance required most voluntary changes in accounting principle to be recognized by including in net income of the period in which the change was made the cumulative effect of changing to the new accounting principle. SFAS No. 154 carries forward existing guidance regarding the reporting of the correction of an error and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Our adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial statements except to the extent that we adopt a voluntary change in accounting principle in a future period that must be accounted for through a restatement of previous financial statements.

In June 2005, FASB issued FASB Staff Position (“FSP”) No. FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” to address the accounting for obligations associated with EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”). The Directive requires EU member countries to adopt legislation to regulate the collection, treatment, recovery and environmentally sound disposal of electrical and electronic waste equipment. Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced. Depending upon the law adopted by the particular country, upon replacement, the waste management obligation for that equipment may be transferred to the producer of the related equipment. The user retains the obligation if they do not replace the equipment.

FSP No. FAS 143-1 requires a commercial user to apply the provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” and related FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” to waste obligations associated with historical equipment. The rules require that a liability be established for the retirement obligation with an offsetting increase to the carrying amount of the related asset. FSP No. FAS 143-1 is effective the later of the first reporting period ending after June 8, 2005 or the date of adoption of the law by the applicable EU member country. We believe that the adoption of this FSP did not have a material effect on our financial position, results of operations or cash flows for those European Union (EU) countries that enacted the Directive into country-specific laws. We are currently evaluating the impact of applying this FSP in the remaining countries in future periods and do not expect the adoption of this provision to have a material effect on our financial position, results of operations or cash flows.

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Certain Factors That May Affect Future Operating Results

You should carefully consider the risks described below. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, and results of operations could be materially harmed and the trading price of our common stock could decline. You should also refer to other information contained in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004, including our consolidated financial statements and related notes.

Our operating results are likely to fluctuate in future periods, which might lead to reduced prices for our stock.

Our annual or quarterly operating results are difficult to predict and are likely to fluctuate significantly in the future as a result of numerous factors, many of which are outside of our control. If our annual or quarterly operating results do not meet the expectations of securities analysts and investors, the trading price of our stock could significantly decline. Factors that could impact our operating results include:

• the rate, timing and volume of orders for the telecommunications infrastructure equipment and services we sell;

• the rate at which telecommunications operators de-install their equipment;

• decreases in our selling prices due to competition in the secondary market, price pressure from OEMs or other competitors;

• our ability to obtain products cost-effectively from OEMs, distributors, operators and other secondary sources of telecommunications equipment;

• our ability to provide equipment and service offerings on a timely basis to satisfy customer demand;

• variations in customer capital spending patterns due to seasonality, economic conditions for telecommunications operators and other factors;

• write-offs due to inventory defects or obsolescence;

• the sales cycle for equipment and services we sell, which can be relatively lengthy, especially as it relates to our lifecycle management services offering;

• delays in the commencement of our operations in new market segments and geographic regions;

• costs relating to possible acquisitions and integration of new businesses, including, but not limited to, costs associated with acquisitions that Somera elects not to pursue; and

• delays or concerns resulting from or related to completed and/or impending consolidation of telecommunications operators.

Our business depends upon our ability to match third party re-used equipment supply with telecommunications operators demand for this equipment and failure to do so could reduce our net revenue or increase our expenses.

Our success depends on our continued ability to match the equipment needs of telecommunications operators with the supply of re-used equipment available in the secondary market. We depend upon maintaining business relationships with third parties who can provide us with re-used equipment and information on available re-used equipment. Failure to effectively manage these relationships and match the needs of our customers with available supply of re-used equipment could damage our ability to generate net revenue. In the event operators decrease the rate at which they de-install their networks, choose not to de-install their networks at all, or choose to sell or otherwise provide re-used equipment to others, it would be more difficult for us to locate this equipment, which could negatively impact our net revenue. Alternatively, if we do not adequately match supply by making equipment purchases in anticipation of sales to our customers that do not materialize prior to the decline in market value of such inventory or obsolescence of such inventory, this could result in higher costs to us in the form of future inventory write-downs.

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A downturn and/or consolidation in the telecommunications industry or an industry trend toward reducing or delaying additional equipment purchases due to cost-cutting and other pressures could reduce demand for our products.

We rely significantly upon customers concentrated in the telecommunications industry as a source of net revenue and re-used equipment inventory. Since 2001, we believe we have experienced a general downturn in the level of capital spending by our telecommunications customers for the products and services we sell. This slow-down in capital spending could result in postponement of network upgrades and reduced sales to our customers. There can be no assurance that the level of capital spending in the telecommunications industry or by our customers specifically will increase significantly or remain at current levels, or generate future net revenue levels at which our business would be profitable in future periods.

The market for supplying equipment and services to telecommunications operators is competitive, and if we cannot compete effectively, our net revenue and gross margins might decline.

Competition among companies who supply equipment and services to telecommunications operators is intense. We currently face competition primarily from four sources: OEMs, distributors, secondary market dealers and telecommunications infrastructure support services companies who sell new and re-used telecommunications infrastructure equipment and services. In addition, in recent years, we have experienced competition from entities founded by former employees of Somera. If we are unable to compete effectively against our current or future competitors, we may have to lower our selling prices and may experience reduced gross margins and loss of market share, either of which could harm our business.

Competition is likely to increase as new companies enter our market, as current competitors expand their products and services, as our competitors consolidate, as former employees join our competitors or found their own companies, and as our customers develop internal capabilities. Increased competition in the secondary market for telecommunications equipment could also heighten demand for the limited supply of re-used equipment, which would lead to increased prices for, and reduce the availability of, this equipment. Any increase in these prices could significantly impact our ability to maintain our gross margins.

We do not have many formal relationships with suppliers of telecommunications equipment and may not have access to adequate product supply.

For the three months ended September 30, 2005, 64.8% of our net revenue was generated from the sale of re-used telecommunications equipment. Typically, we do not have supply contracts to obtain this equipment and are dependent on the de-installation of equipment by operators to provide us with much of the equipment we sell. Our ability to buy re-used equipment from operators, distributors and secondary market dealers is dependent on our relationships with them. If we fail to develop and maintain these business relationships with operators or they are unwilling to sell re-used equipment to us, our ability to sell re-used equipment will suffer. In addition, in the three months ended September 30, 2005, three suppliers each accounted for 17.2%, 15.2%, and 10%, respectively, of our overall equipment purchases. One of these suppliers accounted for 14.8% of our equipment purchases in fiscal year 2004 and accounted for 15.2% of our equipment purchases in the three months ended September 30, 2005. If we are unable to continue to purchase a significant portion of our equipment from these suppliers, then our equipment costs could increase, thereby adversely impacting our operating results. Further, our net revenue is dependent on the sale of new equipment as well as re-used equipment. In the second quarter of 2005, we were informed that the supplier that accounted for 14.8% of 2004 equipment purchases and 15.2% of our third quarter 2005 equipment purchases had declared bankruptcy. If we are unable to continue to purchase equipment from this supplier on acceptable terms or at all, or if our customers are no longer willing to purchase products produced by this supplier due to the bankruptcy or other reasons, then our operating results would be adversely affected.

Our customer base is concentrated and the loss of one or more of our key customers would have a negative impact on our net revenue.

Historically, a significant portion of our sales has been to relatively few customers. Sales to our ten largest customers accounted for 46.7% of our net revenue for the three months ended September 30, 2005 and 39.3% for the three months ended September 30, 2004. In addition, substantially all of our sales are made on a purchase order basis, and we do not have long term purchasing agreements with customers that require our customers to purchase equipment from us. We face a further risk that consolidation among our significant customers, such as the recently completed acquisitions of AT&T Wireless by Cingular Wireless, Nextel by Sprint and Western Wireless by Alltel, and the recently announced acquisitions of AT&T by SBC Communications and MCI by Verizon Communications could result in more customer concentration and fewer sales opportunities that would adversely impact our net revenue. As a result, we cannot be certain that our current customers will continue to purchase from us. The loss of, or any reduction in orders from, a significant customer would have a negative impact on our net revenue.

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We may be forced to reduce the sales prices for the equipment and services we sell, which may impair our ability to maintain our gross margins.

In the future, we expect to reduce prices in response to competition and to generate increased sales volume. As a result of the slow-down in the telecommunications market since 2001, some manufacturers reduced their prices of new telecommunications equipment. If manufacturers reduce the prices of new telecommunications equipment, we may be required to further reduce the price of the new and re-used equipment we sell. If we are forced to reduce our prices or are unable to shift the sales mix towards higher margin equipment and service sales, we will not be able to maintain current gross margins.

The market for re-used telecommunications equipment and telecommunications equipment lifecycle services is relatively new and it is unclear whether our equipment and service offerings and our business will achieve long-term market acceptance.

The market for re-used telecommunications equipment and telecommunications equipment lifecycle services is relatively new and evolving, and we are not certain that our current or potential customers will adopt and deploy re-used telecommunications equipment in their networks or purchase the telecommunications equipment lifecycle services we offer. For example, with respect to re-used equipment that includes a significant software component, potential customers may be unable to obtain a license or sublicense for the software. Even if they do purchase re-used equipment, our potential customers may not choose to purchase re-used equipment from us for a variety of reasons. Our customers may also re-deploy their displaced equipment within their own networks or perform the services we offer internally, which would eliminate their need for our equipment and service offerings. These internal solutions would also limit the supply of re-used equipment available for us to purchase, which would limit the development of this market. Further, we have found that the sales cycle for our recently developed equipment lifecycle services and other services offerings is protracted due to the fact that these offerings are new and involved multiple layers of our customers’ organizations. If we are unable to successfully sell our equipment lifecycle service and other services offerings to our customers or if the sales cycle for these services continues to be protracted, our business could suffer.

We may fail to continue to attract, develop and retain key management and sales personnel, which could negatively impact our business.

We depend on the performance of our executive officers and other key employees. The loss of key members of our senior management or other key employees could negatively impact our operating results and our ability to execute our business strategy. Further, we depend on our sales professionals to serve customers in each of our markets. The loss of key sales professionals could significantly disrupt our relationships with our customers and harm our business. In addition, we do not have “key person” life insurance policies on any of our employees.

Our future success also depends on our ability to attract, retain and motivate highly skilled employees. Competition for employees in the telecommunications equipment and services industry is intense. Additionally, we depend on our ability to train and develop skilled sales people and an inability to do so would significantly harm our growth prospects and operating performance.

Our business may suffer if we are not successful in our efforts to keep up with a rapidly changing market.

The market for the equipment and services we sell is characterized by technological changes, evolving industry standards, changing customer needs and frequent new equipment and service introductions. Our future success in addressing the needs of our customers will depend, in part, on our ability to timely and cost-effectively:

• respond to emerging industry standards and other technological changes;

• develop our internal technical capabilities and expertise;

• broaden our equipment and service offerings; and

• adapt our services to new technologies as they emerge.

Our failure in any of these areas could harm our business. Moreover, any increased emphasis on software solutions as opposed to equipment solutions could limit the availability of new and re-used equipment, decrease customer demand for the equipment we sell, or cause the equipment we sell to become obsolete.

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The lifecycles of telecommunications infrastructure equipment may become shorter, which would decrease the supply of, and carrier demand for, re-used equipment, and telecommunications equipment lifecycle services, which could increase our expenses.

Our sales of re-used equipment and services depend upon telecommunications operator utilization of existing telecommunications network technology. If the lifecycle of equipment comprising operator networks is significantly shortened for any reason, including technology advancements, the installed base of any particular model of equipment would be limited. This limited installed base would reduce the supply of, and demand for, re-used equipment and services we offer, which could decrease our net revenue. Additionally, to the extent that lifecycles for telecommunications equipment are shortened, equipment we hold in anticipation of future sales may, to an accelerating degree, become less valuable or obsolete and subject to an inventory write-down, which would increase our cost of sales levels.

Many of our customers are telecommunications operators that may at any time reduce or discontinue their purchases of the equipment and services we sell to them.

If our customers choose to defer or curtail their capital spending programs, it could have a negative impact on our sales to those telecommunications operators, which would harm our business. A significant portion of our customers are emerging telecommunications operators who compete against existing telecommunications companies. These new participants only recently began to enter these markets, and many of these operators are still building their networks and rolling out their services. They require substantial capital for the development, construction and expansion of their networks and the introduction of their services. If emerging operators fail to acquire and retain customers or are unsuccessful in raising needed funds or responding to any other trends, such as price reductions for their services or diminished demand for telecommunications services in general, then they could be forced to reduce their capital spending programs.

If we fail to implement our strategy of purchasing equipment from and selling equipment and services to Regional Bell Operating Companies, our business will suffer.

One of our strategies is to develop and expand our relationships with Regional Bell Operating Companies, or RBOCs. We believe the RBOCs could provide us with a significant source of additional net revenue. In addition, we believe the RBOCs could provide us with a large supply of re-used equipment. We cannot assure you that the implementation of this strategy will be successful. RBOCs may not choose to sell re-used equipment to us or may not elect to purchase this equipment or services from us. RBOCs may instead develop those capabilities internally or elect to compete with us and resell re-used equipment to our customers or prospective customers or competitors. If we fail to successfully develop our relationships with RBOCs or if RBOCs elect to compete with us, our revenue levels could suffer.

If we do not expand our international operations our business could suffer.

We intend to expand our business in international markets. This expansion will require significant management attention and financial resources to develop a successful international business, including sales, procurement and support channels. Following this strategy, we opened our European headquarters in the fourth quarter of 2000. However, we may not be able to maintain or increase international market demand for the equipment and services we sell, and therefore we might not be able to expand our international operations. Our experience in providing equipment and services outside the United States is increasing, but still developing. Sales to customers outside of the United States accounted for $6.5 million, or 30.0%, of our net revenue for the three months ended September 30, 2005 and $21.8 million, or 21.8%, of our net revenue in the fiscal year 2004.

If we do engage in selective acquisitions, we may experience difficulty assimilating the operations or personnel of the acquired companies, which could threaten our future growth.

If we make acquisitions in the future, we could have difficulty assimilating or retaining the acquired companies’ personnel or integrating their operations, equipment or services into our organization. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, our profitability may suffer because of acquisition-related costs, including, but not limited to, costs associated with acquisitions that Somera elects not to pursue, impairment of goodwill, or amortization of acquired other intangible assets. Furthermore, we may have to incur debt or issue equity securities in any future acquisitions. The incurrence of debt would place an additional financial burden on us and cause our results to suffer and could impose restrictions on our operations. The issuance of equity securities by us in connection with any acquisition would be dilutive to our existing stockholders.

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Defects in the equipment we sell or failure to perform services at a high level of performance may seriously harm our credibility and our business.

Telecommunications operators require a strict level of quality and reliability from telecommunications equipment and service suppliers. Telecommunications equipment is inherently complex and can contain undetected software or hardware errors. If we deliver telecommunications equipment with undetected material defects, or if we perform services at lower than expected quality levels, our reputation, credibility and sales could suffer. Moreover, because the equipment we sell is integrated into our customers’ networks, it can be difficult to identify the source of a problem should one occur. The occurrence of such defects, errors or failures or failure to perform services adequately could also result in delays in installation, product returns, product liability and warranty claims and other losses to us or our customers. In some of our contracts, we have agreed to indemnify our customers against liabilities arising from defects in the equipment or services we sell to them. Furthermore, we supply most of our customers with warranties that cover the equipment and services we offer. While we may carry insurance policies covering these possible liabilities, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim, whether successful or not, could be costly, damage our reputation and distract key personnel, any of which could harm our business.

Our strategy to outsource services could impair our ability to deliver our equipment on a timely basis.

While we have expanded our services capability, we still currently depend on, to a large degree, third parties for a variety of equipment-related services, including engineering, warehousing, repair, transportation, logistics, testing, installation and de-installation. This outsourcing strategy involves risks to our business, including reduced control over delivery schedules, quality and costs and the potential absence of adequate capacity. In the event that any significant subcontractor was to become unable or unwilling to continue to perform their required services, we would have to identify and qualify acceptable replacements. This process could be lengthy, and we cannot be sure that additional sources of third party services would be available to us on a timely basis, or at all.

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Our quarterly net revenue and the price of our stock may be negatively impacted by the seasonal purchasing patterns of our customers.

Our quarterly net revenue may be subject to the seasonal purchasing patterns of our customers, which may occur as a result of our customers’ annual budgetary, procurement and sales cycles. If our quarterly net revenue fails to meet the expectations of analysts due to those seasonal fluctuations, the trading price of our common stock could be negatively affected.

Our ability to meet customer demand and the growth of our net revenue could be harmed if we are unable to manage our inventory needs accurately.

To meet customer demand in the future, we believe it is necessary to maintain or increase some levels of inventory. Failure to maintain adequate inventory levels in these products could hurt our ability to make sales to our customers. In the past, we have experienced inventory shortfalls on certain high demand equipment, and we cannot be certain that we will not experience such shortfalls again in the future, which could harm our ability to meet customer demand. Further, rapid technology advancement could make portions of our existing inventory obsolete and cause us to incur losses. In addition, if our forecasts lead to an accumulation of inventories that are not sold in a timely manner, our business could suffer.

The corruption or interruption of key software systems we use could cause our business to suffer if it delays or restricts our ability to meet our customers’ needs.

We rely on the integrity of key software and systems. Specifically we rely on our relationship management database which tracks information on currently or potentially available re-used equipment. This software and these systems may be vulnerable to harmful applications, computer viruses and other forms of corruption and interruption and is frequently updated by its manufacturer. In the event any form of corruption or interruption affects our software or systems or in the event we fail to update our software or systems, it could delay or restrict our ability to meet our customers’ needs, which could harm our reputation or business.

If we are unable to meet our additional capital needs in the future, we may not be able to execute our business growth strategy.

We currently anticipate that our available cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. However, our resources may not be sufficient to satisfy these requirements. We may need to raise additional funds through public or private debt or equity financings to:

• take advantage of business opportunities, including, but not limited to, more rapid international expansion or acquisitions of complementary businesses;

• develop and maintain higher inventory levels;

• gain access to new product lines;

• develop new services; or

• respond to competitive pressures.

Any additional financing we may need might not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our business could suffer if the inability to raise this funding threatens our ability to execute our business growth strategy. Moreover, if additional funds are raised through the issuance of equity securities, the percentage of ownership of our current stockholders will be reduced. Newly issued equity securities may have rights, preferences and privileges senior to those of investors in our common stock. In addition, the terms of any debt could impose restrictions on our operations.

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We face the risk of future unanticipated charges.

In the fourth quarter of 2003, we reviewed the future realizability of our deferred tax assets. We determined that our ability to generate sufficient future taxable income was uncertain. As such, we took a charge of $24.8 million to write off all of our short and long-term deferred tax assets. In 2004, we increased the valuation allowance by $8.6 million, primarily as a result of additional net operating loss carryforwards generated during the current year as we continue to provide for a full valuation allowance against our net deferred tax assets. In the nine months ended September 30, 2005, we increased the valuation allowance by $4.7 million, primarily as a result of additional net operating loss carryforwards generated during the current year as we continue to provide for a full valuation allowance against our net deferred tax assets. We may incur a similar charge in the future.

New regulations related to equity compensation could adversely affect our operating results and affect our ability to attract and retain key personnel.

Since our inception, we have used stock options as an important component of our employee compensation packages. We believe that our stock option plan is an essential tool to link the long-term interests of our stockholders and employees, and serve to motivate management to make decisions that will, in the long run, give the best returns to stockholders. The Financial Accounting Standards Board (FASB) has implemented changes to United States generally accepted accounting principles that require us to record a charge to earnings for employee stock option grants, as well as other equity-based awards. The changes implemented by FASB relating to the accounting for equity compensation plans are scheduled to go into effect the first quarter of 2006. This accounting pronouncement will negatively impact our operating results and could affect our ability to raise capital on acceptable terms. For an illustrative example of the adverse impact this accounting change may have had on our recent operating results, please see Note 2—”Summary of Significant Accounting Policies: Stock-Based Compensation” to the condensed consolidated financial statements included elsewhere in this report. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

We may not be able to continue to meet the listing criteria for The Nasdaq National Market, which would adversely affect the ability of investors to trade our common stock and could adversely affect our business and financial condition.

Our common stock is currently quoted on the Nasdaq National Market under the symbol “SMRA.” On October 31, 2005, we received a letter from the Nasdaq Stock Market, Inc. (“Nasdaq”) notifying the Company that for the prior 30 consecutive trading days, the bid price of our common stock had closed below the $1.00 per share minimum required for continued inclusion on the Nasdaq National Market pursuant to Nasdaq’s Marketplace Rules. In accordance with the Nasdaq Marketplace Rules, we were provided 180 calendar days, or until May 1, 2006, to regain compliance with this requirement. Compliance will be achieved if the bid price per share of our common stock closes at $1.00 per share or greater for a minimum of ten (10) consecutive trading days prior to May 1, 2006 (or such longer period of time as may be required by Nasdaq, in its discretion). We cannot assure you that we will be able to maintain the listing of our common stock on the Nasdaq National Market in the future. If the closing bid price of our common stock does not close above $1.00 per share for the required time period to regain compliance with the Nasdaq Marketplace Rules, we would be delisted from the Nasdaq National Market. The delisting of our common stock may result in the trading of our common stock on the Nasdaq Capital Market (formerly called the Nasdaq SmallCap Market) or the OTC Bulletin Board. Consequently, a delisting of our common stock from the Nasdaq National Market may reduce the liquidity of our common stock, adversely affect our ability to raise additional necessary capital and could adversely affect our sales efforts due to a potential loss of customer confidence in our business.

Our facilities could be vulnerable to damage from earthquakes and other natural disasters.

Our office in Carpinteria, California, is located on or near known earthquake fault zones and our facilities worldwide are vulnerable to damage from fire, floods, earthquakes, mudslides, power loss, telecommunications failures and similar events. If a disaster occurs that impacts our headquarters and execution and delivery center in Texas, our offices in Carpinteria, California, or our offices in the Netherlands, our ability to test and ship the equipment we sell would be seriously, if not completely, impaired, and our inventory could be damaged or destroyed, which would seriously harm our business. We cannot be sure that the insurance we maintain against fires, floods, earthquakes, mudslides and general business interruptions will be adequate to cover our losses in any particular case.

Our officers and directors exert significant influence over us, and may make future business decisions with which some of our stockholders might disagree.

Our executive officers, directors and entities affiliated with them beneficially own an aggregate of approximately 24.6% of our outstanding common stock as of October 2, 2005. As a result, these stockholders will be able to exercise significant influence over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in our control.

Failure to comply with all of the requirements imposed by Section 404 of the Sarbanes-Oxley Act of 2002 could result in a negative market reaction.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on our internal control over financial reporting in our annual reports on Form 10-K. The annual report is required to contain an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, the independent registered public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the our internal controls over financial reporting. While we have expended and continue to expend significant resources in complying with Section 404, there is a risk that we will not be able to comply with all of the requirements imposed by Section 404. Further, if we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404. If such actions were to occur, we cannot predict how the market or regulators will react.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We have reviewed the provisions of Financial Reporting Release No. 48 “Disclosure of Accounting Policies for Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risks Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” We had no holdings of derivative financial or commodity instruments as of September 30, 2005. In addition, we do not engage in hedging activities.

A significant amount of our revenue and capital spending is denominated in U.S. dollars. We invest our excess cash in short-term, money market certificates of deposits and other securities. Due to the short time the investments are outstanding and their general liquidity, our cash, cash equivalents, and short-term investments do not subject the Company to a material interest rate risk. As of September 30, 2005, we had no long-term debt outstanding.

As a significant amount of our revenue, purchases and capital spending is denominated in U.S. dollars, a strengthening of the U.S. Dollar could make our products less competitive in foreign markets. This risk could become more significant as we expand business outside the United States.

As an international company, we conduct our business in various currencies and are therefore subject to market risk for changes in foreign exchange rates. The Company’s primary exchange rate exposure is with the Euro against the U.S. Dollar. During the nine months ended September 30, 2005, net revenue earned outside the United States accounted for 27.3% of total revenue. During the nine months ended September 30, 2005, purchases outside the United States accounted for 16.2% of total purchases. As a result, we are exposed to foreign currency exchange risk resulting from foreign currency denominated transactions with customers, suppliers and non-U.S. subsidiaries.

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ITEM 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, we may be involved in legal proceedings and litigation arising in the ordinary course of business. As of the date hereof, we are not a party to or aware of any litigation or other legal proceeding that could materially harm our business.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Default Upon Senior Securities

None.

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

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

The following exhibits are filed as part of, or incorporated by reference into, this Report:

Exhibit Number	Exhibit Title
3.1(a)	Amended and Restated Certificate of Incorporation of Somera Communications, Inc., a Delaware corporation, as currently in effect.
3.2(a)	Bylaws of Somera Communications, Inc., as currently in effect.
4.1(a)	Specimen common stock certificate.
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.

Notes:

(a) Incorporated by reference to the Company’s Registration Statement on Form S-1, filed September 10, 1999, as amended (File No. 333-86927).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on this 9th day of November 2005.

SOMERA COMMUNICATIONS, INC.
By:	/s/ DAVID W. HEARD
	David W. Heard President and Chief Executive Officer

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David W. Heard, certify that:

1. I have reviewed this quarterly report on Form 10-Q (this “Report”) of Somera Communications, Inc. (“the registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2005	/s/ DAVID W. HEARD
	David W. Heard President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kent Coker, certify that:

1. I have reviewed this quarterly report on Form 10-Q (this “Report”) of Somera Communications, Inc. (“the registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2005	/s/ KENT COKER
	Kent Coker Senior Vice President, Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

SOMERA COMMUNICATIONS, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, David W. Heard, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Somera Communications, Inc. on Form 10-Q for the quarterly period ended September 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report of Somera Communications, Inc. on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Somera Communications, Inc.

By:	/s/ DAVID W. HEARD
Name:	David W. Heard
Title:	President and Chief Executive Officer (Principal Executive Officer)
Date:	November 9, 2005

I, Kent Coker, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Somera Communications, Inc. on Form 10-Q for the quarterly period ended September 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report of Somera Communications, Inc. on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Somera Communications, Inc.

By:	/s/ KENT COKER
Name:	Kent Coker
Title:	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)
Date:	November 9, 2005