UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)


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




For the
quarterly period ended February 26, 2010




OR


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




For the
transition period from
______________________________to_____________________________




Commission
file No. 0-11003


WEGENER
CORPORATION





(Exact
name of registrant as specified in its charter)





Delaware
              
              81–0371341(State
      or other jurisdiction
              
              (I.R.S.
      Employerof
      incorporation or organization)
              
              Identification
      No.)11350
      Technology Circle, Johns Creek, Georgia
              
              30097-1502(Address
      of principal executive offices)
              
              (Zip
      Code)




Registrant's telephone number,
including area code:  (770) 623-0096




Registrant’s
web site:  HTTP://WWW.WEGENER.COM




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:  YesxNo ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of  “large accelerated filer,” “accelerated filer” and
“smaller reporting company”  in Rule 12b-2 of the Exchange
Act.  (Check one):


Large
accelerated filer ̈Accelerated filer ̈Non-accelerated
filer ̈Smaller reporting
companyx




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ̈Nox




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





Common Stock, $.01 par
value
              
              12,647,051 SharesClass
              
              Outstanding
      at March 31, 2010










WEGENER
CORPORATION


Form
10-Q For the Quarter Ended February 26, 2010





INDEX





PART
      I.  Financial InformationItem
      1.
                                                  Financial
      StatementsIntroduction
                                                  3Consolidated
      Statements of Operations (Unaudited) - Three and Six Months Ended February
      26, 2010 and February 27, 2009
                                                  4Consolidated
      Balance Sheets (Unaudited) – February 26, 2010  and August 28,
      2009
                                                  5Consolidated
      Statements of Shareholders' Equity (Unaudited) - Six Months Ended February
      26, 2010 and February 27, 2009
                                                  6Consolidated
      Statements of Cash Flows (Unaudited) - Six Months Ended February 26, 2010
      and February 27, 2009
                                                  7Notes
      to Consolidated Financial Statements (Unaudited)
                                                  8Item
      2.
                                                  Management's
      Discussion and Analysis of Financial Condition
      and Results of Operations
                                                  18Item
      3.
                                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                                  27Item
      4.
                                                  Controls
      and Procedures
                                                  27Item
      4T.
                                                  Controls
      and Procedures
                                                  27PART
      II. Other InformationItem
      1A.
                                                  Risk
      Factors
                                                  27Item
      4.
                                                  Submission
      of Matters to a Vote of Security Holders
                                                  28Item
      6.
                                                  Exhibits
                                                  29Signatures
                                                  30




2





PART I.  FINANCIAL
INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





INTRODUCTION
- CONSOLIDATED FINANCIAL STATEMENTS





The
consolidated financial statements of Wegenerä Corporation (the
“Company”, “we”, “our” or “us”) included herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange
Commission.  The consolidated balance sheet as of February 26, 2010;
the consolidated statements of shareholders' equity as of February 26, 2010, and
February 27, 2009; the consolidated statements of operations for the three and
six months ended February 26, 2010, and February 27, 2009; and the consolidated
statements of cash flows for the six months ended February 26, 2010, and
February 27, 2009, have been prepared without audit.  The consolidated
balance sheet as of August 28, 2009 has been audited by independent registered
public accountants.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures herein
are adequate to make the information presented not misleading.  It is
suggested that these unaudited consolidated financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended August 28,
2009, File No. 0-11003.  These consolidated financial statements
include the accounts of Wegener Communications, Inc. (WCI), our wholly-owned
subsidiary.





In the
opinion of the Company, the statements for the unaudited interim periods
presented include all adjustments, which were of a normal recurring nature,
necessary to present a fair statement of the results of such interim
periods.  The results of operations for the interim periods presented
are not necessarily indicative of the results of operations for the entire
year.


3





WEGENER
CORPORATION AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three months ended
                                    
                                    
                                    Six months endedFebruary 26,
                                      2010
                                    
                                    
                                    February 27,
                                      2009
                                    
                                    
                                    February 26,
                                      2010
                                    
                                    
                                    February 27,
                                      2009Revenues,
      net
                                    
                                    $
                                    2,351,146
                                    
                                    
                                    $
                                    4,511,124
                                    
                                    
                                    $
                                    4,268,931
                                    
                                    
                                    $
                                    6,833,902Operating
      costs and expensesCost
      of products sold
                                    
                                    
                                    1,644,892
                                    
                                    
                                    
                                    2,973,682
                                    
                                    
                                    
                                    3,138,925
                                    
                                    
                                    
                                    4,672,097Selling,
      general and administrative
                                    
                                    
                                    813,433
                                    
                                    
                                    
                                    1,026,371
                                    
                                    
                                    
                                    1,775,108
                                    
                                    
                                    
                                    2,196,053Research
      and development
                                    
                                    
                                    287,053
                                    
                                    
                                    
                                    471,222
                                    
                                    
                                    
                                    661,120
                                    
                                    
                                    
                                    1,079,843Operating
      costs and expenses
                                    
                                    
                                    2,745,378
                                    
                                    
                                    
                                    4,471,275
                                    
                                    
                                    
                                    5,575,153
                                    
                                    
                                    
                                    7,947,993Operating
      (loss) income
                                    
                                    
                                    (394,232
                                    )
                                    
                                    
                                    39,849
                                    
                                    
                                    
                                    (1,306,222
                                    )
                                    
                                    
                                    (1,114,091
                                    )Interest
      expense
                                    
                                    
                                    (127,512
                                    )
                                    
                                    
                                    (31,602
                                    )
                                    
                                    
                                    (205,931
                                    )
                                    
                                    
                                    (70,400
                                    )Net
      (loss) earnings
                                    
                                    $
                                    (521,744
                                    )
                                    
                                    $
                                    8,247
                                    
                                    
                                    $
                                    (1,512,153
                                    )
                                    
                                    $
                                    (1,184,491
                                    )Net
      (loss) earnings per share:Basic
      and diluted
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    0.00
                                    
                                    
                                    $
                                    (0.12
                                    )
                                    
                                    $
                                    (0.09
                                    )Shares
      used in per share calculationBasic
      and diluted
                                    
                                    
                                    12,647,051
                                    
                                    
                                    
                                    12,647,051
                                    
                                    
                                    
                                    12,647,051
                                    
                                    
                                    
                                    12,647,051





See
accompanying notes to consolidated financial statements.


4


WEGENER
CORPORATION AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





February 26,
                                  2010
                                
                                
                                August 28,
                                  2009AssetsCurrent
      assetsCash
                                
                                $
                                675,116
                                
                                
                                $
                                3,476Accounts
      receivable, net
                                
                                
                                1,444,727
                                
                                
                                
                                1,581,926Inventories,
      net
                                
                                
                                3,650,446
                                
                                
                                
                                4,463,586Other
      current assets
                                
                                
                                231,489
                                
                                
                                
                                171,676Total
      current assets
                                
                                
                                6,001,778
                                
                                
                                
                                6,220,664Property
      and equipment, net
                                
                                
                                1,590,834
                                
                                
                                
                                1,720,031Capitalized
      software costs, net
                                
                                
                                1,267,320
                                
                                
                                
                                1,265,445Other
      assets
                                
                                
                                308,462
                                
                                
                                
                                335,557Total
      assets
                                
                                $
                                9,168,394
                                
                                
                                $
                                9,541,697Liabilities
      and Shareholders’ EquityCurrent
      liabilitiesLine
      of credit and note payable
                                
                                $
                                4,250,000
                                
                                
                                $
                                2,799,088Accounts
      payable
                                
                                
                                1,649,321
                                
                                
                                
                                1,964,367Accrued
      expenses
                                
                                
                                1,705,619
                                
                                
                                
                                1,523,925Deferred
      revenue
                                
                                
                                502,477
                                
                                
                                
                                568,673Customer
      deposits
                                
                                
                                391,438
                                
                                
                                
                                503,952Total
      current liabilities
                                
                                
                                8,498,855
                                
                                
                                
                                7,360,005Commitments
      and contingenciesShareholders’
      equityCommon
      stock, $.01 par value; 30,000,000 shares authorized; 12,647,051 shares
      issued and outstanding
                                
                                
                                126,471
                                
                                
                                
                                126,471Additional
      paid-in capital
                                
                                
                                20,006,702
                                
                                
                                
                                20,006,702Accumulated
      deficit
                                
                                
                                (19,463,634
                                )
                                
                                
                                (17,951,481
                                )Total
      shareholders’ equity
                                
                                
                                669,539
                                
                                
                                
                                2,181,692Total
      liabilities and shareholders’ equity
                                
                                $
                                9,168,394
                                
                                
                                $
                                9,541,697





See
accompanying notes to consolidated financial statements.


5





WEGENER
CORPORATION AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


(Unaudited)





AdditionalCommon Stock
                      
                      
                      Paid-in
                      
                      
                      AccumulatedShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      DeficitBalance
      at August 29, 2008
                      
                      
                      12,647,051
                      
                      
                      $
                      126,471
                      
                      
                      $
                      20,006,702
                      
                      
                      $
                      (15,345,782
                      )Net
      loss for the six months
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,184,491
                      )BALANCE
      at February 27, 2009
                      
                      
                      12,647,051
                      
                      
                      $
                      126,471
                      
                      
                      $
                      20,006,702
                      
                      
                      $
                      (16,530,273
                      )Balance
      at August 28, 2009
                      
                      
                      12,647,051
                      
                      
                      $
                      126,471
                      
                      
                      $
                      20,006,702
                      
                      
                      $
                      (17,951,481
                      )Net
      loss for the six months
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,512,153
                      )BALANCE
      at February 26, 2010
                      
                      
                      12,647,051
                      
                      
                      $
                      126,471
                      
                      
                      $
                      20,006,702
                      
                      
                      $
                      (19,463,634
                      )





See
accompanying notes to consolidated financial statements.




6


WEGENER
CORPORATION AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six months endedFebruary 26,
                        2010
                      
                      
                      February 27,
                        2009Cash
      flows from operating activitiesNet
      loss
                      
                      $
                      (1,512,153
                      )
                      
                      $
                      (1,184,491
                      )Adjustments
      to reconcile net loss to cash used for operating
    activities:Depreciation
      and amortization
                      
                      
                      588,730
                      
                      
                      
                      758,366Increase
      in provision for bad debts
                      
                      
                      15,000
                      
                      
                      
                      -Increase
      in provision for inventory reserves
                      
                      
                      40,000
                      
                      
                      
                      230,000Decrease
      in provision for warranty reserves
                      
                      
                      -
                      
                      
                      
                      (130,000
                      )Changes
      in assets and liabilitiesAccounts
      receivable
                      
                      
                      122,199
                      
                      
                      
                      561,825Inventories
                      
                      
                      773,140
                      
                      
                      
                      (164,006
                      )Other
      assets
                      
                      
                      (59,813
                      )
                      
                      
                      (85,430
                      )Accounts
      payable
                      
                      
                      (315,046
                      )
                      
                      
                      766,375Accrued
      expenses
                      
                      
                      181,694
                      
                      
                      
                      (406,827
                      )Deferred
      revenue
                      
                      
                      (66,196
                      )
                      
                      
                      (59,568
                      )Customer
      deposits
                      
                      
                      (112,514
                      )
                      
                      
                      (1,320,302
                      )Net
      cash used for operating activities
                      
                      
                      (344,959
                      )
                      
                      
                      (1,034,058
                      )Cash
      flows from investment activitiesProperty
      and equipment expenditures
                      
                      
                      (6,593
                      )
                      
                      
                      (642
                      )Capitalized
      software additions
                      
                      
                      (424,548
                      )
                      
                      
                      (538,895
                      )License
      agreement, patent, and trademark expenditures
                      
                      
                      (3,172
                      )
                      
                      
                      (12,239
                      )Net
      cash used for investing activities
                      
                      
                      (434,313
                      )
                      
                      
                      (551,776
                      )Cash
      flows from financing activitiesNet
      change in borrowings under line of credit
                      
                      
                      1,200,912
                      
                      
                      
                      1,588,343Proceeds
      from note payable
                      
                      
                      250,000
                      
                      
                      
                      -Net
      cash  provided by financing activities
                      
                      
                      1,450,912
                      
                      
                      
                      1,588,343Increase
      in cash
                      
                      
                      671,640
                      
                      
                      
                      2,509Cash,
      beginning of period
                      
                      
                      3,476
                      
                      
                      
                      8,023Cash,
      end of period
                      
                      $
                      675,116
                      
                      
                      $
                      10,532Supplemental
      disclosure of cash flow information:Cash
      paid for Interest
                      
                      $
                      18,166
                      
                      
                      $
                      70,400





See
accompanying notes to consolidated financial statements.


7





WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note  1  Going
Concern


The
accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and liquidation of
liabilities in the normal course of business and do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the possible inability of the Company to continue as a going
concern.




We have
experienced recurring net losses from operations, which have caused an
accumulated deficit of approximately $19,464,000 at February 26,
2010.  We had a working capital deficit of approximately $2,497,000 at
February 26, 2010 compared to a working capital deficit of $1,139,000 at August
28, 2009 which compared to working capital of approximately $1,053,000 at August
29, 2008.




Our cash
flow requirements during the first six months of fiscal 2010 were financed by
our loan facility and an unsecured promissory note. Our combined net borrowings
increased $1,451,000 to $4,250,000 at February 26, 2010 from $2,799,000 at
August 28, 2009.  Our loan facility, amended and effective October 8,
2009, provides a maximum borrowing limit of $4,000,000.  As described
in Note 8, the bank assigned our facility to a related party.  At
February 26, 2010, the outstanding balance on the line of credit was at the
maximum limit of $4,000,000, the balance on the unsecured promissory note was
$250,000 and our cash balances primarily funded from loan advances were
approximately $675,000, net of outstanding checks of approximately
$197,000.




During
the fourth quarter of fiscal 2008 and in fiscal 2009, we made reductions in
headcount to bring the number of employees at August 28, 2009, to 63 compared to
91 at August 29, 2008, and reduced engineering consulting and other operating
and overhead expenses.  Beginning in January 2009 and continuing to
date, we reduced paid working hours Company-wide by approximately
10%.  During the first and second quarters of fiscal 2010, we made
further reductions in headcount to bring the current number of employees to 50.
During fiscal 2009, as well as to date in fiscal 2010, due to insufficient cash
flow from operations and borrowing limitations under our loan facility, we
negotiated extended payment terms with our two offshore vendors and have been
extending other vendors well beyond normal payment terms. Until such vendors are
paid within normal payment terms, no assurances can be given that required
services and materials needed to support operations will continue to be
provided.  In addition, no assurances can be given that vendors will
not pursue legal means to collect past due balances owed.  Any
interruption of services or materials or initiation of legal means to collect
balances owed would likely have an adverse impact on our operations and could
impact our ability to continue as a going concern.




During
the first six months of fiscal 2010 bookings were approximately $3.9 million and
during fiscal 2009 bookings were $5.5 million.  These fiscal 2010
bookings and fiscal 2009 bookings, as well as our fiscal 2008 bookings,
particularly during the fourth quarter of fiscal 2008, were well below our
expectations primarily as a result of customer delays in purchasing decisions,
deferral of project expenditures and general adverse economic and credit
conditions.




Our
backlog scheduled to ship within eighteen months was approximately $5.0 million
at February 26, 2010, compared to $4.3 million at August 28, 2009, and $5.9
million at February 27, 2009.  The total multi-year backlog at
February 26, 2010 was approximately $6.2 million, compared to $6.8 million at
August 28, 2009 and $9.7 million at February 27, 2009. Approximately $2.7
million of the February 26, 2010 backlog is scheduled to ship during the
remainder of fiscal 2010.




Our
bookings and revenues to date in fiscal 2010 and during fiscal 2009 have been
insufficient to attain profitable operations andto provide adequate
levels of cash flow from operations.  In addition, significant fiscal
2010 shippable bookings are currently required to meet our quarterly financial
and cash flow projections for the remainder of fiscal 2010.




Our near
term liquidity and ability to continue as a going concern is dependent on our
ability to timely collect our existing accounts receivable balances and to
generate sufficient new orders and revenues in the near term to provide
sufficient cash flow from operations to pay our operating expenses and to reduce
past due amounts owed to vendors and service providers. Should increased
revenues not materialize, we would need to further reduce operating costs to
bring them in line with reduced revenue levels.  Should we be unable
to achieve near term profitability and generate sufficient cash flow from
operations and if we are unable to further reduce operating costs, we would need
to raise additional capital or obtain additional borrowings beyond our existing
loan facility. No assurances can be given that operating costs can be further
reduced, or if required, that additional capital or borrowings would be
available to allow us to continue as a going concern. If we are unable to
continue as a going concern, we will likely be forced to seek protection under
the federal bankruptcy laws.




8


WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





On
February 17, 2010, we received notification from The Nasdaq Stock Market
(“Nasdaq”) (the “Notification”), that as a result of the information presented
at an appeal hearing held on January 13, 2010, the Panel granted our request to
remain listed on Nasdaq subject to conditions stipulated in the
Notification.  The Notification stipulated that on or before June 7,
2010 (the “Exception Deadline”), we are required to have stockholders’ equity of
at least $2,500,000 and our common stock to maintain a minimum bid price of
$1.00 per share for a period of ten consecutive trading days.  On
April 8, 2010, we notified the Panel that based on our current level of existing
backlog of orders scheduled to ship in our fiscal third quarter ending May 28,
2010, and our expected level of new shippable bookings for the third quarter, we
do not expect that we will be able to comply with the Nasdaq requirements by the
Exception Deadline.  As a result, we expect that the Panel would issue
a final determination to delist the Company’s shares.  Delisting of
our common stock by Nasdaq, would likely adversely affect the trading market for
our common stock, as price quotations may not be as readily obtainable, which
would likely have a material adverse effect on the market price of our common
stock and could impact our ability to raise additional capital.





Note
2  Significant Accounting Policies


The
significant accounting policies followed by the Company are set forth in Note 2
to our audited consolidated financial statements included in the Annual Report
on Form 10-K for the year ended August 28, 2009.





Revenue
Recognition


Our
revenue recognition policies are in compliance with FASB Accounting Standards
Codification (ASC) Topic 605 “Revenue Recognition.”  Revenue is
recognized when persuasive evidence of an agreement with the customer exists,
products are shipped or title passes pursuant to the terms of the agreement with
the customer, the amount due from the customer is fixed or determinable,
collectibility is reasonably assured, and when there are no significant future
performance obligations.  Service revenues are recognized at the time
of performance. Extended service maintenance contract revenues are recognized
ratably over the maintenance contract term, which is typically one year. The
unrecognized revenue portion of maintenance contracts invoiced is recorded as
deferred revenue.  At February 26, 2010, deferred extended service
maintenance revenues were $492,000 and deferred revenues related to the fair
value of future performance obligations were $10,000 and are expected to be
recognized as revenue in varying amounts throughout fiscal 2010 and into fiscal
2011.





We
recognize revenue in certain circumstances before delivery has occurred
(commonly referred to as “bill and hold” transactions).  In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods be held for future delivery as
scheduled and designated by them, and no additional performance obligations
exist by the Company.  For these transactions, the finished goods are
segregated from inventory and normal billing and credit terms are
granted.  For the three and six months ended February 26, 2010, no
revenues were recorded as bill and hold transactions.  For the three
and six months ended February 27, 2009, revenues in the amount of $2,172,000 and
$2,269,000, respectively, were recorded as bill and hold
transactions.





These
policies require management, at the time of the transaction, to assess whether
the amounts due are fixed or determinable, collection is reasonably assured, and
if future performance obligations exist.  These assessments are based
on the terms of the agreement with the customer, past history and credit
worthiness of the customer.  If management determines that collection
is not reasonably assured or future performance obligations exist, revenue
recognition is deferred until these conditions are satisfied.





Our
principal sources of revenue are from the sales of various satellite
communications equipment.  Embedded in the Company’s products is
internally developed software of varying applications.  We evaluate
our products to assess whether software is more than incidental to a
product.  When we conclude that software is more than incidental to a
product, we will account for the product as a software product. Revenue on
software products and software-related elements is recognized in accordance with
ASC Topic 985-605 “Software-Revenue Recognition.”  Significant
judgment may be required in determining whether a product is a software or
hardware product.





We have
included all shipping and handling billings to customers in revenues, and
freight costs incurred for product shipments have been included in cost of
products sold.





Earnings
Per Share


Basic and
diluted net earnings per share were computed in accordance with ASC Topic 260
“Earnings Per Share.”   Basic net earnings per share is computed
by dividing net earnings available to common shareholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period and excludes the dilutive effect of stock options.  Diluted net
earnings per share gives effect to all dilutive potential common shares
outstanding during a period.  In computing diluted net earnings per
share, the average stock price for the period is used in determining the number
of shares assumed to be reacquired under the treasury stock method from the
exercise of stock options.


9





WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Share-Based
Compensation


We
account for share-based payments to employees, including grants of employee
stock options, in accordance with ASC Topic 718, “Compensation-Stock
Compensation” (ASC 718).  ASC 718 requires that these awards be
recognized as compensation expense in the consolidated financial statements
based on their fair values. That expense will be recognized over the period
during which an employee is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting
period).  For the three and six months ended February 26, 2010 and
February 27, 2009, there was no stock-based compensation expense. No options
were granted during the six months ended February 26, 2010.





Bank
Overdrafts


Bank
overdrafts consist of outstanding checks that have not cleared our
bank.  Overdrafts are offset against cash balances to the extent that
cash balances are available in the account on which the checks are
issued.  Remaining balances of overdrafts are included in our accounts
payable balances.  At February 26, 2010, outstanding checks in the
amounts of $197,000 were offset against cash balances.





Fair
Value of financial Instruments


The
carrying amount of cash and other current assets and liabilities, such as
accounts receivable and accounts payable as presented in the consolidated
financial statements, approximates fair value based on the short-term nature of
these instruments. We believe the carrying amounts of our line of credit and
note payable borrowings approximate fair value because the interest rates at
February 26, 2010, approximated market interest rates.





Fiscal
Year


We use a
fifty-two, fifty-three week year.  The fiscal year ends on the Friday
closest to August 31.  Fiscal year 2010 contains fifty-three weeks
while 2009 contains fifty-two weeks.





Note
3  Accounts Receivable


Accounts
receivable are summarized as follows:





February 26,
                                  2010
                                
                                
                                August 28,
                                  2009Accounts receivable – trade
                                
                                $
                                1,456,095
                                
                                
                                $
                                1,649,047Other receivables
                                
                                
                                75,528
                                
                                
                                
                                78,8891,531,623
                                
                                
                                
                                1,727,936Less allowance for doubtful
      accounts
                                
                                
                                (86,896
                                )
                                
                                
                                (146,010
                                )Accounts receivable, net
                                
                                $
                                1,444,727
                                
                                
                                $
                                1,581,926




10


WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
4  Inventories


Inventories
are summarized as follows:





February 26,
                      
                      
                      August 28,2010
                      
                      
                      2009Raw
      material
                      
                      $
                      4,044,045
                      
                      
                      $
                      4,430,492Work-in-process
                      
                      
                      810,578
                      
                      
                      
                      958,658Finished
      goods
                      
                      
                      3,404,953
                      
                      
                      
                      3,763,7938,259,576
                      
                      
                      
                      9,152,943Less
      inventory reserves
                      
                      
                      (4,609,130
                      )
                      
                      
                      (4,689,357
                      )Inventories,
      net
                      
                      $
                      3,650,446
                      
                      
                      $
                      4,463,586





Our
inventory reserve of approximately $4,609,000 at February 26, 2010 is to provide
for items that are potentially slow-moving, excess or
obsolete.  During the first six months of fiscal 2010, inventory
reserves were increased by provisions of $40,000 and reduced by writeoffs of
approximately $120,000.  Changes in market conditions, lower than
expected customer demand and rapidly changing technology could result in
additional obsolete and slow-moving inventory that is unsaleable or saleable at
reduced prices.  No estimate can be made of a range of amounts of loss
from obsolescence that are reasonably possible should our sales efforts not be
successful.





Note
5   Other Assets


Other
assets consisted of the following:





February 26, 2010Cost
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  NetLicense
      agreements
                  
                  $
                  958,800
                  
                  
                  $
                  (958,800
                  )
                  
                  $
                  -Patents
      and patent applications
                  
                  
                  356,229
                  
                  
                  
                  (77,655
                  )
                  
                  
                  278,574Trademarks
      and trademark applications
                  
                  
                  82,820
                  
                  
                  
                  (59,821
                  )
                  
                  
                  22,999Loan
      facility fees
                  
                  
                  25,000
                  
                  
                  
                  (25,000
                  )
                  
                  
                  -Other
                  
                  
                  6,889
                  
                  
                  
                  -
                  
                  
                  
                  6,889$
                  1,429,738
                  
                  
                  $
                  (1,121,276
                  )
                  
                  $
                  308,462




August 28, 2009Cost
                      
                      
                      AccumulatedAmortization
                      
                      
                      NetLicense
      agreements
                      
                      $
                      958,800
                      
                      
                      $
                      (953,384
                      )
                      
                      $
                      5,416Patents
      and patent applications
                      
                      
                      353,057
                      
                      
                      
                      (66,799
                      )
                      
                      
                      286,258Trademarks
      and trademark applications
                      
                      
                      82,820
                      
                      
                      
                      (54,159
                      )
                      
                      
                      28,661Loan
      facility fees
                      
                      
                      25,000
                      
                      
                      
                      (16,667
                      )
                      
                      
                      8,333Other
                      
                      
                      6,889
                      
                      
                      
                      -
                      
                      
                      
                      6,889$
                      1,426,566
                      
                      
                      $
                      (1,091,009
                      )
                      
                      $
                      335,557





Amortization
expense of other assets for the three and six months ended February 26, 2010,
amounted to $8,000 and $30,000, respectively.  Amortization expense of
other assets for the three and six months ended February 27, 2009, amounted to
$40,000 and $80,000, respectively.




11


WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




We
conduct an ongoing review of our intellectual property rights and potential
trademarks.  As of February 26, 2010, we have cumulatively incurred
$195,000 of legal fees related to the filing of applications for various patents
and $1,000 related to the filing of trademarks.  Upon issuance, these
legal costs will be amortized on a straight-line basis over the lesser of the
legal life or the estimated useful lives of the patent or
trademark.  If it becomes more likely than not that the patent
application will not be granted, we will write-off the deferred cost at that
time. At February 26, 2010, the cost of registered patents and trademarks
amounted to $161,000 and $82,000, respectively.  Patents and
trademarks are amortized over their estimated useful life of four to ten
years.  License agreements are amortized over their estimated useful
life of one to five years.  Loan facility fees are amortized over
twelve months.




Note
6  Accrued Expenses


Accrued
expenses consist of the following:





February 26,
                          2010
                        
                        
                        August 28,
                          2009Vacation
                        
                        $
                        532,176
                        
                        
                        $
                        530,652Payroll
      and related expenses
                        
                        
                        260,629
                        
                        
                        
                        223,319Royalties
                        
                        
                        190,148
                        
                        
                        
                        161,247Warranty
                        
                        
                        86,448
                        
                        
                        
                        98,882Taxes
      and insurance
                        
                        
                        105,202
                        
                        
                        
                        154,035Commissions
                        
                        
                        31,516
                        
                        
                        
                        31,516Professional
      fees
                        
                        
                        213,913
                        
                        
                        
                        290,072Interest
                        
                        
                        187,765
                        
                        
                        
                        -Other
                        
                        
                        97,822
                        
                        
                        
                        34,202$
                        1,705,619
                        
                        
                        $
                        1,523,925





Accrued  Warranty


We
warrant our products for a 12 to 14 month period beginning at the date of
shipment.  The warranty provides for repair or replacement of
defective products returned during the warranty period at no cost to the
customer.  We expense costs for routine warranty repairs as
incurred.  Additional provisions are made for non-routine warranty
repairs based on estimated costs to repair at the point in time in which the
warranty claim is identified.  For the six months ended February 26,
2010, no additional warranty provisions were made and $12,000 for satisfied
warranty claims was charged to the accrual.  For the six months ended
February 27, 2009, the warranty provisions were reduced by $130,000 for
previously estimated provisions that were no longer required.





Note
7  Deferred Revenue


Deferred
revenue consists of the unrecognized revenue portion of extended service
maintenance contracts and fair value of revenue related to future performance
obligations. Extended service maintenance contract revenues are recognized
ratably over the maintenance contract term, which is typically one
year.  At February 26, 2010, deferred extended service maintenance
revenues were $492,000 and deferred revenues related to future performance
obligations were $10,000 and are expected to be recognized as revenue in varying
amounts throughout fiscal 2010 and into fiscal 2011.





Note  8  Finance
Arrangements


Revolving
Line of Credit and Term Loan Facility


Effective
September 16, 2009, we entered into an Eleventh Amendment (“Amendment”) to the
Loan and Security Agreement (the “Loan Agreement”) with Bank of America, N.A.
(the “bank”). The Amendment extended the maturity date of our revolving line of
credit and term loan facility (“loan facility”) with the bank to November 30,
2009 (previously September 30, 2009), reduced the maximum available credit limit
to $4,000,000 (previously $5,000,000) and increased the interest rate to the
bank’s prime rate plus two percent (previously the bank’s prime
rate).  In addition, the Amendment allowed for over advances in excess
of the existing availability collateral formula of up to $500,000 during the
term of the loan facility.  The Amendment was subject to the bank
receiving, on or before October 15, 2009, a fully executed asset purchase
agreement or merger agreement satisfactory to the bank, in its reasonable
business judgment, for the sale or merger of Wegener Corporation to or into a
third-party purchaser; provided, however, the failure to provide such fully
executed asset purchase or merger agreement to the bank on or before October 15,
2009 would have been an automatic Event of Default as defined and set forth in
the Loan Agreement, and the bank would have all of its rights and remedies as
provided for in the Loan Agreement without further notice.


12





WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





On
October 8, 2009, the bank assigned its rights (the “Assignment”) under the Loan
Agreement to The David E. Chymiak Trust Dated December 15, 1999 (the
“Trust”).  Immediately before becoming such assignee, the Trust
entered into a Twelfth amendment to the Loan Agreement, dated October 8, 2009
(the “Twelfth Amendment”) which became effective immediately upon the
consummation of the Assignment.  Accordingly, by virtue of the
Assignment, the Trust succeeded to all the rights and obligations of the bank
under the Loan Agreement, except as otherwise provided in the Twelfth Amendment.
In connection with the Assignment, the Trust paid a total of $2,941,000 to the
bank amounting to all amounts we owed to the bank.  Therefore, we no
longer have a lending relationship with the bank.





WCI’s
loan facility, amended and effective October 8, 2009, consists of a revolving
line of credit and term loan with a maximum combined available credit limit of
$4,000,000.  The term of the amended loan facility is eighteen (18)
months beginning October 8, 2009 (“Original Term”), or upon demand in the event
of default as defined by the loan facility.  The outstanding loan
balance bears interest at the rate of twelve percent (12%) per
annum.  The loan facility automatically renews for successive twelve
(12) month periods provided, however, the lender may terminate the loan facility
by providing ninety (90) days’ prior written notice of termination at any time
beginning on or after ninety (90) days prior to the expiration of the Original
Term.  Principal and interest shall be payable upon the earlier of the
maturity date, an event of default, or 90 days following the date on which the
Trust provides written notice to terminate the agreement.  All
principal and interest shall be payable in U.S. dollars or, upon mutual
agreement of the parties decided in good faith at the time payment is due, other
good and valuable consideration.





The loan
is secured by a first lien on substantially all of WCI’s assets, including land
and buildings, and is guaranteed by Wegener Corporation.  At February
26, 2010, the outstanding balance on the revolving line of credit was at the
maximum credit limit of $4,000,000.  At April 1, 2010, the outstanding
balance on the line of credit remained at $4,000,000 and our cash balances were
approximately $443,000, net of outstanding checks of approximately
$193,000.





The
amended loan facility requires us to be in compliance with a solvency
representation provision on the last day of our third quarter of fiscal 2010
(May 28, 2010). This representation requires us to be able to pay our debts as
they become due, have sufficient capital to carry on our business and own
property at a fair saleable value greater than the amount required to pay our
debts.  In addition, we are required to retain certain executive
officers and are precluded from paying dividends.  The Twelfth
Amendment removed the minimum tangible net worth and minimum fixed coverage
ratio annual debt covenant provisions.





On
October 1, 2009, we entered into an unsecured promissory note with David E.
Chymiak in the amount of two hundred and fifty thousand dollars
($250,000).  The loan bears interest at the rate of 8.0% per year and
had an initial maturity date of October 31, 2009. The maturity date was
subsequently extended to May 31, 2010.





David E.
Chymiak is a beneficial owner of 8.8% of our outstanding common stock. The David
E. Chymiak Trust Dated December 15, 1999, is controlled by Mr.
Chymiak.





Note
9  Income Taxes


For the
six months ended February 26, 2010, no income tax benefit was recorded due to an
increase in the deferred tax asset valuation allowance.  The valuation
allowance increased $544,000 in the first six months of fiscal
2010.  At February 26, 2010, net deferred tax assets of $7,161,000
were fully reserved by a valuation allowance.





At
February 26, 2010, we had a federal net operating loss carryforward of
approximately $13,287,000, which expires beginning fiscal 2020 through fiscal
2030.  Additionally, we had an alternative minimum tax credit of
$134,000 which was fully offset by the valuation allowance.




We are
subject to U.S. federal income tax as well as income tax of numerous state
jurisdictions. We are subject to U.S. federal tax examinations by tax
authorities for fiscal years 2005 through 2009. Income tax examinations that we
may be subject to from the various state taxing authorities vary by
jurisdiction. Our policy for penalties and interest is to include such amounts,
if any, in income tax expense.


13


WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




Note
10. Share-Based Compensation Plans


2010 Incentive
Plan.On February 2, 2010, our stockholders approved the 2010
Incentive Plan (the “2010 Plan”).  The effective date of the 2010 Plan
was January 1, 2010 and the 2010 Plan has a ten-year term.  The Plan
provides for awards of up to an aggregate of 1,250,000 shares of common stock
which may be represented by (i) incentive or nonqualified stock options, (ii)
stock appreciation rights (tandem and free-standing), (iii) restricted stock,
(iv) deferred stock, or (v) performance units entitling the holder, upon
satisfaction of certain performance criteria, to awards of common stock or
cash.  The maximum total number of shares of Restricted Stock,
Deferred Stock and/or Performance Units that may be granted at full value shall
not exceed 500,000 shares.  Eligible participants include
officers and other key employees, non-employee directors, consultants and
advisors to the Company.  The exercise price per share in the case of
incentive stock options and any tandem stock appreciation rights may not be less
than 100% of the fair market value on the date of grant or, in the case of an
option granted to a 10% or greater stockholder, not less than 110% of the fair
market value on the date of grant.  The exercise price for any other
option and stock appreciation rights shall be at least 100% of the fair market
value on the date of grant.  The exercise period for nonqualified
stock options may not exceed ten years and one day from the date of the grant,
and the expiration period for incentive stock options or stock appreciation
rights shall not exceed ten years from the date of the grant (five years for a
10% or greater stockholder).  No awards have been granted under the
2010 Plan.




The
following table summarizes stock option transactions under the predecessor 1998
Incentive Plan, which expired and terminated effective December 31, 2007, for
the six months ended February 26, 2010:





Number
                              of Shares
                            
                            
                            Range of
                              Exercise
                              Prices
                            
                            
                            Weighted
                              Average
                              Exercise PriceOutstanding
      at August 28, 2009
                            
                            
                            731,375
                            
                            
                            $
                            .63
      – 2.50
                            
                            
                            $
                            1.42Forfeited
      or cancelled
                            
                            
                            (66,000
                            )
                            
                            
                            2.31
                            
                            
                            
                            2.31Outstanding
      at February 26, 2010
                            
                            
                            665,375
                            
                            
                            $
                            .63
      – 2.50
                            
                            
                            $
                            1.33Available
      for issue at February 26, 2010
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Options
      exercisable atFebruary
      26, 2010
                            
                            
                            665,375
                            
                            
                            $
                            .63
      – 2.50
                            
                            
                            $
                            1.33August
      28, 2009
                            
                            
                            731,375
                            
                            
                            $
                            .63
      – 2.50
                            
                            
                            $
                            1.42





The key
terms of the stock options granted under the 1998 incentive plan are included in
the Company's Annual Report on Form 10-K for the fiscal year ended August 29,
2008.


14


WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
11 Earnings Per Share


The
following tables represent required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net (loss) earnings per
share computations.





Three months endedFebruary 26, 2010
                                      
                                      February 27, 2009Earnings
                                        (Numerator)
                                      
                                      Shares
                                        (Denominator)
                                      
                                      Per
                                        share
                                        amount
                                      
                                      Earnings
                                        (Numerator)
                                      
                                      Shares
                                        (Denominator)
                                      
                                      Per
                                        share
                                        amountNet
      (loss) earnings
                                      
                                      $
                                      (521,744
                                      )
                                      
                                      
                                      
                                      
                                      
                                      $
                                      8,247Basic
      and diluted (loss) earnings per
share:Net
      (loss) earnings available to common shareholders
                                      
                                      $
                                      (521,744
                                      )
                                      12,647,051
                                      
                                      $
                                      (0.04
                                      )
                                      $
                                      8,247
                                      
                                      12,647,051
                                      
                                      $
                                      0.00





Six months endedFebruary 26, 2010
                                              
                                              February 27, 2009Earnings
                                                (Numerator)
                                              
                                              Shares
                                                (Denominator)
                                              
                                              Pershare
                                                amount
                                              
                                              Earnings
                                                (Numerator)
                                              
                                              Shares
                                                (Denominator)
                                              
                                              
                                              Pershare
                                                amountNet
      loss
                                              
                                              $
                                              (1,512,153
                                              )
                                              
                                              
                                              
                                              
                                              
                                              $
                                              (1,184,491
                                              )Basic
      and diluted loss per share:Net
      loss available to
      common shareholders
                                              
                                              $
                                              (1,512,153
                                              )
                                              12,647,051
                                              
                                              $
                                              (0.12
                                              )
                                              $
                                              (1,184,491
                                              )
                                              12,647,051
                                              
                                              $
                                              (0.09
                                              )





Stock
options excluded from the diluted net (loss) earnings per share calculation due
to their anti-dilutive effect are as follows:




Three months ended
                                    
                                    
                                    Six months endedFebruary 26,
                                    
                                    
                                    February 27,
                                    
                                    
                                    February 26,
                                    
                                    
                                    February 27,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009Common
      stock options:Number
      of shares
                                    
                                    665,375
                                    
                                    
                                    766,375
                                    
                                    
                                    665,375
                                    
                                    
                                    766,375Exercise
      price
                                    
                                    $.63 to $2.50
                                    
                                    
                                    $.63 to $2.50
                                    
                                    
                                    $.63 to $2.50
                                    
                                    
                                    $.63 to $2.50




Note
12 Segment Information and Significant Customers


In
accordance with ASC Topic 280 “Segment Reporting,” we operate within a single
reportable segment, the manufacture and sale of satellite communications
equipment.





In this
single operating segment the Company has three sources of revenues as
follows:





Three months ended
                      
                      
                      Six months endedFebruary 26,
                      
                      
                      February 27,
                      
                      
                      February 26,
                      
                      
                      February 27,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Product
      LineDirect
      Broadcast Satellite
                      
                      $
                      2,265,012
                      
                      
                      $
                      4,364,727
                      
                      
                      $
                      4,061,522
                      
                      
                      $
                      6,483,507Analog
      and Custom Products
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,461Service
                      
                      
                      86,134
                      
                      
                      
                      146,397
                      
                      
                      
                      207,409
                      
                      
                      
                      340,934$
                      2,351,146
                      
                      
                      $
                      4,511,124
                      
                      
                      $
                      4,268,931
                      
                      
                      $
                      6,833,902




15


WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Concentration
of products representing 10% or more of the respective periods’ revenues are as
follows:





Three months ended
                                
                                
                                Six months endedFebruary 26,
                                  2010
                                
                                
                                February 27,
                                  2009
                                
                                
                                February 26,
                                  2010
                                
                                
                                February 27,
                                  2009ProductiPump
      Media Servers
                                
                                
                                (a)
                                
                                22.4
                                %
                                
                                20.9
                                %
                                
                                20.9
                                %Professional
      and broadcast receivers
                                
                                15.6
                                %
                                
                                
                                (a)
                                
                                21.7
                                %
                                
                                
                                (a)Enterprise
      media receivers
                                
                                14.7
                                %
                                
                                
                                (a)
                                
                                10.1
                                %
                                
                                
                                (a)Network
      control products
                                
                                10.8
                                %
                                
                                13.5
                                %
                                
                                12.5
                                %
                                
                                
                                (a)Audio
      broadcast receivers
                                
                                37.9
                                %
                                
                                13.3
                                %
                                
                                31.4
                                %
                                
                                
                                (a)Nielsen
      encoders
                                
                                
                                (a)
                                
                                10.5
                                %
                                
                                
                                (a)
                                
                                
                                (a)





(a)
Revenues for the period were less than 10% of total revenues.




Products
representing 10% or more of annual revenues are subject to fluctuations from
quarter to quarter as new products and technologies are introduced, new product
features and enhancements are added and as customers upgrade or expand their
network operations.





Revenues by geographic area are as
follows:





Three months ended
                  
                  
                  Six months endedFebruary 26,
                    2010
                  
                  
                  February 27,
                    2009
                  
                  
                  February 26,
                    2010
                  
                  
                  February 27,
                    2009Geographic
      AreaUnited
      States
                  
                  $
                  1,774,469
                  
                  
                  $
                  4,335,784
                  
                  
                  $
                  3,489,525
                  
                  
                  $
                  6,553,584Latin
      America
                  
                  
                  34,118
                  
                  
                  
                  88,788
                  
                  
                  
                  59,875
                  
                  
                  
                  181,897Canada
                  
                  
                  22,948
                  
                  
                  
                  1,870
                  
                  
                  
                  24,558
                  
                  
                  
                  11,752Europe
                  
                  
                  512,310
                  
                  
                  
                  83,932
                  
                  
                  
                  611,877
                  
                  
                  
                  85,586Other
                  
                  
                  7,301
                  
                  
                  
                  750
                  
                  
                  
                  83,096
                  
                  
                  
                  1,083$
                  2,351,146
                  
                  
                  $
                  4,511,124
                  
                  
                  $
                  4,268,931
                  
                  
                  $
                  6,833,902





All of
the Company’s long-lived assets are located in the United States. Customers
representing 10% or more of the respective periods’ revenues are as
follows:





Three months ended
                            
                            
                            Six months endedFebruary 26,
                              2010
                            
                            
                            February 27,
                              2009
                            
                            
                            February 26,
                              2010
                            
                            
                            February 27,
                              2009Customer
      1
                            
                            22.5
                            %
                            
                            
                            (a)
                            
                            22.8
                            %
                            
                            13.2
                            %Customer
      2
                            
                            17.5
                            %
                            
                            
                            (a)
                            
                            
                            (a)
                            
                            
                            (a)Customer
      3
                            
                            12.7
                            %
                            
                            
                            (a)
                            
                            
                            (a)
                            
                            
                            (a)Customer
      4
                            
                            10.2
                            %
                            
                            
                            (a)
                            
                            10.1
                            %
                            
                            
                            (a)Customer
      5
                            
                            
                            (a)
                            
                            47.6
                            %
                            
                            
                            (a)
                            
                            37.2
                            %Customer
      6
                            
                            
                            (a)
                            
                            11.6
                            %
                            
                            
                            (a)
                            
                            
                            (a)




(a)
Revenues for the period were less than 10% of total revenues.




Note
13  Commitments


We have
one manufacturing and purchasing agreement for certain finished goods
inventories. At February 26, 2010, outstanding purchase commitments under this
agreement amounted to $575,000.


16





WEGENER
CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
14  Guarantees and Indemnifications


Letters
of Credit


We have
from time to time provided standby letters of credit in the ordinary course of
business to certain suppliers pursuant to manufacturing and purchasing
agreements. At February 26, 2010, we had no letters of credit
outstanding.





Financing
Agreements


The
Company guarantees the loan facility of WCI. The facility provides a maximum
available credit limit of $4,000,000. At February 26, 2010, $4,000,000 was
outstanding on the loan facility.





Indemnification
Obligations


We are
obligated to indemnify our officers and the members of our Board of Directors
pursuant to our bylaws and contractual indemnity agreements. We routinely sell
products with a limited intellectual property indemnification included in the
terms of sale or in certain contractual arrangements. The scope of these
indemnities varies, but in some instances includes indemnification for damages
and expenses (including reasonable attorneys’ fees). Certain requests for
indemnification have been received by us pursuant to these arrangements (see
Part I, Item 3. Legal Proceedings, in our, Annual Report on Form 10-K for the
year ended August 28, 2009 for further discussion).


17




WEGENER
CORPORATION AND SUBSIDIARIES





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





This
information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited consolidated financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended August 28, 2009 contained in the Company’s 2009 Annual Report on Form
10-K.





Certain
statements contained in this filing are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995, and the Company
intends that such forward-looking statements are subject to the safe harbors
created thereby.  Forward-looking statements may be identified by words
such as "believes," "expects," "projects," "plans," "anticipates," and similar
expressions, and include, for example, statements relating to expectations
regarding  future sales, income and cash flows.  Forward-looking
statements are based upon the Company’s current expectations and assumptions,
which are subject to a number of risks and uncertainties including, but not
limited to:  customer acceptance and effectiveness of recently introduced
products; development of additional business for the Company’s digital video and
audio transmission product lines; effectiveness of the sales organization; the
successful development and introduction of new products in the future; delays in
the conversion by private and broadcast networks to next generation digital
broadcast equipment; acceptance by various networks of standards for digital
broadcasting; the Company’s liquidity position and capital resources; general
market and industry conditions which may not improve during fiscal year
2010  and beyond; and success of the Company’s research and development
efforts aimed at developing new products.  Additional potential risks
and uncertainties include, but are not limited to, economic conditions, customer
plans and commitments, product demand, government regulation, rapid
technological developments and changes, intellectual property disputes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, availability of raw materials, new and existing
well-capitalized competitors, and other risks and uncertainties detailed from
time to time in the Company’s periodic Securities and Exchange Commission
filings, including the Company’s most recent Annual Report on Form
10-K.  Such forward-looking statements are subject to risks,
uncertainties and other factors and are subject to change at any time, which
could cause actual results to differ materially from future results expressed or
implied by such forward-looking statements.  Forward-looking
statements speak only as of the date the statement was made.




These
risks are exacerbated by the recent crisis in national and international
financial markets and global economic downturn, and we are unable to predict
with certainty what long-term effect these developments will continue to have on
our Company.  During 2008 and into 2009, the capital and credit
markets experienced extended volatility and disruption.  We believe
that these unprecedented developments have adversely affected our business,
financial condition and results of operations in fiscal years 2008 and 2009 and
into the first six months of fiscal 2010.




Forward-looking
statements speak only as of the date the statement was made.  The Company
does not undertake any obligation to update any forward-looking
statements.




OVERVIEW





We design
and manufacture satellite communications equipment through WCI, an international
provider of digital video and audio solutions for broadcast television, radio,
telco, private and cable networks. With over 30 years experience in optimizing
point-to-multipoint multimedia distribution over satellite, fiber, and IP
networks, WCI offers a comprehensive product line that handles the scheduling,
management and delivery of media rich content to multiple devices, including
video screens, computers and audio devices.  WCI focuses on long- and
short-term strategies for bandwidth savings, dynamic advertising, live events
and affiliate management.




WCI’s
product line includes: iPump® media servers for file-based and live broadcasts;
Compel® Network Control and Compel® Conditional Access for dynamic command,
monitoring and addressing of multi-site video, audio, and data networks; and the
Unity® satellite media receivers for live radio and video
broadcasts.  Applications served include:  digital signage,
linear and file-based TV distribution, linear and file-based radio distribution,
Nielsen rating information, broadcast news distribution, business music
distribution, corporate communications, video and audio simulcasts.




18


Revenues
for the three months ended February 26, 2010, decreased $2,160,000 or 47.9% to
$2,351,000 from $4,511,000 for the same period in fiscal
2009.  Revenues for the six months ended February 25, 2010 decreased
$2,565,000 or 37.5% to $4,269,000 from $6,834,000 for the same period in fiscal
2009. The operating results for the three and six months ended February 26, 2010
were a net loss of $(522,000) or $(0.04) per share and a net loss of
$(1,512,000) or $(0.12) per share, respectively, compared to net earnings of
$8,000 or less than $0.01 per share and a net loss of $(1,184,000) or $(0.09)
per share, respectively, for the three and six months ended February 27,
2009.





Financial
Position and Liquidity





At
February 26, 2010, our primary source of liquidity was a $4,000,000 loan
facility, which matures on April 7, 2011, and an unsecured promissory note in
the amount of $250,000 which matures on May 31, 2010.  During the
first six months of fiscal 2010, our line of credit and unsecured promissory
note net outstanding borrowings increased $1,451,000 to $4,250,000 at February
26, 2010, from $2,799,000 at August 28, 2009.  At February 26, 2010,
the outstanding balance on the line of credit was at the maximum credit limit of
$4,000,000 and our cash balances primarily funded from loan advances were
approximately $675,000, net of outstanding checks of approximately
$197,000.  At April 1, 2010, the outstanding balance on the line of
credit remained at $4,000,000 and our cash balances were approximately $443,000,
net of outstanding checks of approximately $193,000.





During
the first six months of fiscal 2010 bookings were approximately $3.9 million and
during fiscal 2009 bookings were $5.5 million.  These fiscal 2010
bookings and fiscal 2009 bookings, as well as our fiscal 2008 bookings,
particularly during the fourth quarter of fiscal 2008, were well below our
expectations primarily as a result of customer delays in purchasing decisions,
deferral of project expenditures and general adverse economic and credit
conditions.





Our
bookings and revenues to date in fiscal 2010 and during fiscal 2009 have been
insufficient to attain profitable operations andto provide adequate
levels of cash flow from operations.  In addition, significant fiscal
2010 shippable bookings are currently required to meet our quarterly financial
and cash flow projections for the remainder of fiscal 2010.




Our near
term liquidity and ability to continue as a going concern is dependent on our
ability to timely collect our existing accounts receivable balances and to
generate sufficient new orders and revenues in the near term to provide
sufficient cash flow from operations to pay our operating expenses. Should
increased revenues not materialize, we would need to further reduce operating
costs to bring them in line with reduced revenue levels.  Should we be
unable to achieve near term profitability and generate sufficient cash flow from
operations and if we are unable to further reduce operating costs, we would need
to raise additional capital or obtain additional borrowings beyond our existing
loan facility. No assurances can be given that operating costs can be further
reduced, or if required, that additional capital or borrowings would be
available to allow us to continue as a going concern. If we are unable to
continue as a going concern, we will likely be forced to seek protection under
the federal bankruptcy laws.  (See Note 1 to the Consolidated
Financial Statements).





Operating
activities used $345,000 of cash and investing activities used $434,000 of cash,
which consisted of capitalized software additions of $425,000, patent
application expenditures of $3,000 and equipment additions of
$6,000.  (See the Liquidity and Capital Resources section for further
discussion.)





Current
Developments





On
December 9, 2009, we received a letter (the “December 9th
Letter”) from The Nasdaq Stock Market (“Nasdaq”) indicating that the Company’s
securities would be delisted from Nasdaq at the opening of business on December
16, 2009 and a Form 25-NSE would be filed with the Securities and Exchange
Commission (the “Commission”) which would remove the Company’s securities from
listing and registration on Nasdaq.  However, the December 9th Letter
also indicated that an official appeal by the Company to the Nasdaq Hearing
Panel (the “Panel”) would stay the suspension of the Company’s securities and
the filing of the Form 25-NSE pending the Panel’s determination.  On
December 11, 2009, the Company officially filed an appeal with the
Panel.





On
February 17, 2010, the Company received notification from Nasdaq (the
“Notification”), that as a result of the information presented by the Company at
the appeal hearing held on January 13, 2010, the Panel granted the Company’s
request to remain listed on Nasdaq subject to conditions stipulated in the
Notification.





The
Notification stipulated that on or before June 7, 2010 (the “Exception
Deadline”), the Company is required to be compliant with Listing Rule 5550(b)
which requires stockholders’ equity of at least $2,500,000 or the Company
meeting the listing alternatives of (i) a market value of listed securities of
$35 million, or (ii) net income from continuing operations of $500,000 in the
most recently completed fiscal year or in two of the last three most recently
completed fiscal years. In addition, the Company is required to be compliant
with Marketplace Rule 4320, (current Listing Rule 5550(a) (2)), which requires
the Company’s common stock to maintain a minimum bid price of $1.00 per share.
In order to regain such compliance, the Company’s common stock must maintain a
minimum closing bid price of $1.00 per share for a period of ten consecutive
trading days or beyond ten trading days at the determination of the
Panel.




19


Should
the Company not be able to meet both requirements by the Exception Deadline, the
Panel would issue a final determination to delist the Company’s shares and would
suspend trading on Nasdaq effective on the second business day from the date of
the final determination.





The
Company is required to notify the Panel of any significant events occurring
prior to June 7, 2010, including, without limitation, any event that may call
into question the Company’s historical financial information or that may impact
the Company’s ability to maintain compliance with any Nasdaq listing requirement
or the Exception Deadline.  The Panel reserved the right to reconsider
their decision based on any event, condition or circumstance that exists or
develops that would, in the opinion of the Panel, make continued listing of the
Company’s common stock inadvisable or unwarranted.





On April
8, 2010, we notified the Panel that based on our current level of existing
backlog of orders scheduled to ship in our fiscal third quarter ending May 28,
2010, and our expected level of new shippable bookings for the third quarter, we
do not expect that we will be able to comply with Nasdaq Listing Rule 5550(b) by
the Exception Deadline. Therefore, we do not expect to effect a reverse stock
split of the Company’s issued and outstanding shares of common stock in order to
regain compliance with the $1.00 minimum bid requirement of Listing Rule 5550(a)
(2).  As a result, we expect that the Panel would issue a final
determination to delist the Company’s shares. (See Part II, Item 1A. Risk
Factors.)





During
the second quarter of fiscal 2007, the Board of Directors formed a committee of
independent directors (the “committee”) to explore strategic and financial
alternatives to enhance shareholder value.  We retained Near Earth LLC
as our exclusive financial advisor in this evaluation process.  These
strategic alternatives may include: (i) technology licensing agreements, (ii)
product development and marketing arrangements, joint ventures or strategic
partnerships, (iii) strategic acquisitions, mergers or other business
combinations, or (iv) the merger or sale of all or part of the Company. On July
16, 2009, we entered into a non-binding letter of intent (the “LOI”) with
Sencore, Inc. (“Sencore”), a portfolio company of The Riverside Company, a
private equity firm, regarding a possible acquisition of Wegener Corporation by
Sencore.  The exclusivity period set forth in the LOI expired
September 13, 2009. Wegener Corporation’s Board of Directors unanimously voted
to terminate the LOI and on September 17, 2009, officially notified Sencore of
the termination. Effective October 8, 2009, based on its completion of a twelfth
amendment to our revolving line of credit and term loan facility, Wegener
Corporation Board of Directors voted to conclude the Strategic Alternatives
review process and disband the Strategic Alternatives Committee of the Board.
(See the Liquidity and Capital Rescources section for further
discussion.)




20


RESULTS
OF OPERATIONS


THREE
AND SIX MONTHS ENDED FEBRUARY 26, 2010 COMPARED TO THREE AND SIX MONTHS ENDED
FEBRUARY 27, 2009


The
following table sets forth, for the periods indicated, the components of our
results of operations as a percentage of sales:





Three
      months ended
                          
                          
                          Six
      months endedFebruary
      26,
                            2010
                          
                          
                          February
      27,
                            2009
                          
                          
                          February
      26,
                            2010
                          
                          
                          February
      27,
                            2009Revenues
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %Cost
      of products sold
                          
                          
                          70.0
                          
                          
                          
                          65.9
                          
                          
                          
                          73.5
                          
                          
                          
                          68.4Gross
      margin
                          
                          
                          30.0
                          
                          
                          
                          34.1
                          
                          
                          
                          26.5
                          
                          
                          
                          31.6Selling,
      general, and administrative
                          
                          
                          34.6
                          
                          
                          
                          22.8
                          
                          
                          
                          41.6
                          
                          
                          
                          32.1Research
      & development
                          
                          
                          12.2
                          
                          
                          
                          10.4
                          
                          
                          
                          15.5
                          
                          
                          
                          15.8Operating
      (loss) income
                          
                          
                          (16.8
                          )
                          
                          
                          .9
                          
                          
                          
                          (30.6
                          )
                          
                          
                          (16.3
                          )Interest
      expense
                          
                          
                          (5.4
                          )
                          
                          
                          (.7
                          )
                          
                          
                          (4.8
                          )
                          
                          
                          (1.0
                          )Net
      (loss) earnings
                          
                          
                          (22.2
                          )%
                          
                          
                          .2
                          %
                          
                          
                          (35.4
                          )%
                          
                          
                          (17.3
                          )%





The
operating results for the three and six months ended February 26, 2010 were a
net loss of $(522,000) or $(0.04) per share and a net loss of $(1,512,000) or
$(0.12) per share, respectively, compared to net earnings of $8,000 or less than
$0.01 per share and a net loss of $(1,184,000) or $(0.09) per share,
respectively, for the three and six months ended February 27, 2009.





Revenues
- Revenues for the three months ended February 26, 2010 decreased $2,160,000 or
47.9% to $2,351,000 from $4,511,000 for the same period in fiscal
2009.  Revenues for the six months ended February 26, 2010 decreased
$2,565,000 or 37.5% to $4,269,000 from $6,834,000 for the same period in fiscal
2009.





Direct
Broadcast Satellite (DBS) revenues (including service revenues) decreased
$2,160,000 or 47.9% in the second quarter of fiscal 2010 to $2,351,000 from
$4,511,000 in the same period of fiscal 2009.  For the six months
ended February 26, 2010, DBS revenues decreased $2,555,000 or 37.4% to
$4,269,000 from $6,824,000 for the six months ended February 27,
2009.  The decreases in revenues for the three and six months ended
February 26, 2010, were due to a decrease in shippable bookings for the periods
primarily as a result of customer delays in purchasing decisions, deferral of
project expenditures and general adverse economic and credit
conditions.  Fiscal 2010 second quarter and first six month revenues
included continued shipments of Encompass LE2, our next generation business
music audio receiver, to business music provider, Muzak LLC., Unity® 4600,
Unity® 550 and
Unity® 4650
receivers to Roberts Communications Network for network upgrades, shipments of
our Unity® 550 for
network upgrades to a faith based private network and shipments to MegaHertz for
distribution of our products to the U.S. cable market. In addition, revenues
included shipments of our Compel® network
control system and Unity® 202
enterprise audio receivers to a new customer for upgrades to its existing
background music network.  Fiscal 2009 second quarter and first six
month revenues benefited from shipments of our iPump®6420
media servers and Compel® network
control software for Dial Global’s network expansion, and included continued
shipments of Encompass LE2 to business music provider, Muzak LLC., and shipments
to MegaHertz for distribution of our products to the U.S. cable
market.





Our
revenues and bookings are subject to the timing of significant orders from
customers and new product introductions, and as a result revenue levels may
fluctuate from quarter to quarter.  For the three months ended
February 26, 2010, four customers accounted for 22.5%, 17.5%, 12.7% and 10.2% of
revenues, respectively.  For the six months ended February 26, 2010,
two of these customers accounted for 22.8% and 10.1% of revenues,
respectively.  For the three months ended February 27, 2009, two
customers accounted for 47.6% and 11.6% of revenues,
respectively.  For the six months ended February 27, 2009, two
customers accounted for 37.2% and 13.2% of revenues,
respectively.  Sales to a relatively small number of major customers
have typically comprised a majority of our revenues and that trend is expected
to continue throughout fiscal 2010 and beyond.





Our
backlog is comprised of undelivered, firm customer orders which are scheduled to
ship within eighteen months.  The backlog was approximately $5.0
million at February 26, 2010, compared to $4.3 million at August 28, 2009, and
$5.9 million at February 27, 2009.  Three customers accounted for
approximately 64.6%, 13.1% and 7.9%, respectively, of the backlog at February
26, 2010.  The total multi-year backlog at February 26, 2010, was
approximately $6.2 million compared to $6.8 million at August 28, 2009 and $9.7
million at February 27, 2009.




21


Gross
Profit Margins - The Company's gross profit margin percentages were 30.0%
and 26.5 % for the three and six month periods ended February 26, 2010, compared
to 34.1% and 31.6 % for the three and six month periods ended February 27,
2009.  Gross profit margin dollars decreased $831,000 and $1,032,000,
respectively, for the three and six months ended February 26, 2010, compared to
the same periods in fiscal 2009.  The decreases in margin percentages
and dollars for the three and six months ended February 27, 2009 were mainly due
to the decrease in revenues which resulted in higher unit fixed costs. Profit
margins in the second quarter and first six months of fiscal 2010 included
inventory reserve charges of $25,000 and $40,000, respectively, compared to
$215,000 and $230,000, respectively, for the same periods in fiscal 2009.
Capitalized software amortization expenses included in cost of sales for the
three and six months ended February 26, 2010, were $212,000 and $423,000,
respectively, compared to $250,000 and $501,000, respectively, for the same
periods in fiscal 2009. Profit margins in the second quarter and first six
months of fiscal 2009 were favorable impacted by the reversal of an accrued
warranty liability of $130,000 for previously estimated provisions that were no
longer required.





Selling,
General and Administrative - Selling, general and administrative
(SG&A) expenses decreased $213,000, or 20.8%, to $813,000 for the three
months ended February 26, 2010, from $1,026,000 for the three months ended
February 27, 2009.  For the six months ended February 26, 2010,
SG&A expenses decreased $421,000, or 19.2%, to $1,775,000 from $2,196,000
for the same period ended February 27, 2009.  Corporate SG&A
expenses in the second quarter of fiscal 2010 decreased $2,000, or 1.3%, to
$179,000 from $181,000 for the same period in fiscal 2009. For the six months
ended February 26, 2010, corporate SG&A expenses decreased $114,000, or
26.3%, to $321,000 from $435,000 in the same period in fiscal 2009. The
corporate SG&A decreases for the six months of fiscal 2010 were mainly due
to lower professional fees and director compensation expense.  WCI’s
SG&A expenses for the three months ended February 26, 2010 decreased
$210,000, or 24.9%, to $635,000 from $845,000 and for the six months ended
February 26, 2010, decreased $307,000, or 17.4%, to $1,454,000 from $1,761,000
compared to the same periods in fiscal 2009.  The decrease in WCI’s
SG&A expenses for the three months ended February 26, 2010 was mainly due to
decreases in (i) salaries and related payroll costs of $153,000 primarily due to
a 10% reduction in Company-wide paid working hours beginning in January 2009 and
reductions in headcount, (ii) general overhead costs of $61,000 due to
elimination of 401k company matching expense and overall cost reduction efforts
of overhead expenses and (iii) sales and marketing expenses of
$8,000.  WCI’s SG&A expenses in the first six months of fiscal
2010 included approximately $171,000 of severance costs compared to
approximately $12,000 in the same period of fiscal 2009.  The increase
in SG&A severance costs of $159,000 were offset by decreases in (i) salaries
and related payroll costs of $173,000 due to the reductions in headcount and
paid working hours, (ii) sales and marketing expenses of $40,000, and (iii)
general overhead costs of $108,000 due the cost reduction efforts, elimination
of 401k company matching expense and reductions in loan origination fee
amortization expense. These decreases were offset by an increase and bad debt
provisions of $15,000.  As a percentage of revenues, SG&A expenses
were 34.6% and 41.6% for the three and six month periods ended February 26,
2010, compared to 22.8% and 32.1% in the same periods in fiscal
2009.





Research
and Development - Research and development (R&D) expenditures,
including capitalized software development costs, were $499,000, or 21.2% of
revenues, and $1,086,000, or 25.4% of revenues, for the three and six month
periods ended February 26, 2010, compared to $756,000, or 16.7% of revenues, and
$1,619,000, or 23.7%, of revenues, for the same periods in fiscal
2009.  The decreases in expenditures in the three and six months ended
February 26, 2010, compared to the same periods of fiscal 2009, were mainly due
to lower salaries, as a result of reduced head count and the 10% reduction in
Company-wide paid working hours.  Capitalized software development
costs amounted to $212,000 and $425,000 for the second quarter and first six
months of fiscal 2010 compared to $285,000 and $539,000 for the same periods in
fiscal 2009.  The decreases in capitalized software costs were related
to completed projects and the reductions in headcount.  R&D
expenses, excluding capitalized software expenditures, were $287,000, or 12.2%
of revenues, and $661,000, or 15.5% of revenues, for the three and six months
ended February 26, 2010, compared to $471,000, or 10.4% of revenues, and
$1,080,000, or 15.8%, of revenues, in the same periods of fiscal
2009.  The decreases in expenses in the three and six month periods of
fiscal 2010 compared to the same periods in fiscal 2009 were mainly due to the
decrease in salaries.  We believe current staffing levels are adequate
to accomplish research and development activities in fiscal
2010.  Should additional engineering resources be required in fiscal
2010, we believe engineering consulting services would be sufficiently
available.





Interest
Expense - Interest expense increased $96,000 to $128,000 for the three
months ended February 26, 2010, from $32,000 for the three months ended February
27, 2009.  For the six months ended February 26, 2010, interest
expense increased $135,000 to $206,000 from $71,000 for the same period ended
February 27, 2009.  The increase was primarily due to the increase in
our loan interest rate and an increase in the line of credit and unsecured
promissory note outstanding balances, as further discussed in the Liquidity and
Capital Resources section.





Income
Tax Expenses-
For the six months ended February 26, 2010, no income tax benefit was recorded
due to an increase in the deferred tax asset valuation allowance.  The
valuation allowance increased $544,000 in the first six months of fiscal
2010.  At February 26, 2010, net deferred tax assets of $7,161,000
were fully reserved by a valuation allowance.  At February 26, 2010,
we had a federal net operating loss carryforward of approximately $13,287,000,
which expires beginning fiscal 2020 through fiscal
2030.  Additionally, we had an alternative minimum tax credit of
$134,000 which was fully offset by the valuation allowance.




22


LIQUIDITY
AND CAPITAL RESOURCES


SIX
MONTHS ENDED FEBRUARY 26, 2010




We have
experienced recurring net losses from operations, which have caused an
accumulated deficit of approximately $19,464,000 at February 26,
2010.  We had a working capital deficit of approximately $2,497,000 at
February 26, 2010 compared to a working capital deficit of $1,139,000 at August
28, 2009 which compared to working capital of approximately $1,053,000 at August
29, 2008.




Our cash
flow requirements during the first six months of fiscal 2010 were financed by
our loan facility and an unsecured promissory note. Our combined net borrowings
increased $1,451,000 to $4,250,000 at February 26, 2010 from $2,799,000 at
August 28, 2009.  Our loan facility, amended and effective October 8,
2009, provides a maximum borrowing limit of $4,000,000.  As described
in Note 8, the bank assigned our facility to a related party.  At
April 1, 2010, the outstanding balance on the line of credit remained at
$4,000,000 and our cash balances were approximately $443,000, net of outstanding
checks of approximately $193,000.




During
the fourth quarter of fiscal 2008 and in fiscal 2009, we made reductions in
headcount to bring the number of employees at August 28, 2009, to 63 compared to
91 at August 29, 2008, and reduced engineering consulting and other operating
and overhead expenses.  Beginning in January 2009 and continuing to
date, we reduced paid working hours Company-wide by approximately
10%.  During the first and second quarters of fiscal 2010, we made
further reductions in headcount to bring the current number of employees to 50.
During fiscal 2009, as well as to date in fiscal 2010, due to insufficient cash
flow from operations and borrowing limitations under our loan facility, we
negotiated extended payment terms with our two offshore vendors and have been
extending other vendors well beyond normal payment terms. Until such vendors are
paid within normal payment terms, no assurances can be given that required
services and materials needed to support operations will continue to be
provided.  In addition, no assurances can be given that vendors will
not pursue legal means to collect past due balances owed. Any interruption of
services or materials or initiation of legal means to collect balances owed
would likely have an adverse impact on our operations and could impact our
ability to continue as a going concern.




During
the first six months of fiscal 2010 bookings were approximately $3.9 million and
during fiscal 2009 bookings were $5.5 million.  These fiscal 2010
bookings and fiscal 2009 bookings, as well as our fiscal 2008 bookings,
particularly during the fourth quarter of fiscal 2008, were well below our
expectations primarily as a result of customer delays in purchasing decisions,
deferral of project expenditures and general adverse economic and credit
conditions.




The
backlog was approximately $5.0 million at February 26, 2010, compared to $4.3
million at August 28, 2009, and $5.9 million at February 27,
2009.  The total multi-year backlog at February 26, 2010, was
approximately $6.2 million compared to $6.8 million at August 28, 2009 and $9.7
million at February 27, 2009.  Approximately $2.7 million of the
February 26, 2010 backlog is scheduled to ship during fiscal 2010.




Our
bookings and revenues to date in fiscal 2010 and during fiscal 2009 have been
insufficient to attain profitable operations andto provide adequate
levels of cash flow from operations.  In addition, significant fiscal
2010 shippable bookings are currently required to meet our quarterly financial
and cash flow projections for the remainder of fiscal 2010.




Our near
term liquidity and ability to continue as a going concern is dependent on our
ability to timely collect our existing accounts receivable balances and to
generate sufficient new orders and revenues in the near term to provide
sufficient cash flow from operations to pay our operating expenses and to reduce
past due amounts owed to vendors and service providers. Should increased
revenues not materialize, we would need to further reducing operating costs to
bring them in line with reduced revenue levels.  Should we be unable
to achieve near term profitability and generate sufficient cash flow from
operations and if we are unable to further reduce operating costs, we would need
to raise additional capital or obtain additional borrowings beyond our existing
loan facility. No assurances can be given that operating costs can be further
reduced, or if required, that additional capital or borrowings would be
available to allow us to continue as a going concern. If we are unable to
continue as a going concern, we will likely be forced to seek protection under
the federal bankruptcy laws.





On July
16, 2009, we entered into a non-binding letter of intent (the “LOI”) with
Sencore, Inc. (“Sencore”), a portfolio company of The Riverside Company, a
private equity firm, regarding a possible acquisition of Wegener Corporation by
Sencore.  The exclusivity period set forth in the LOI expired
September 13, 2009. Wegener Corporation’s Board of Directors unanimously voted
to terminate the LOI and on September 17, 2009, officially notified Sencore of
the termination.




23


Effective
September 16, 2009, we entered into an Eleventh Amendment (“Amendment”) to the
Loan and Security Agreement (the “Loan Agreement”) with Bank of America, N.A.
(the “bank”). The Amendment extended the maturity date of our revolving line of
credit and term loan facility (“loan facility”) with the bank to November 30,
2009 (previously September 30, 2009), reduced the maximum available credit limit
to $4,000,000 (previously $5,000,000) and increased the interest rate to the
bank’s prime rate plus two percent (previously the bank’s prime
rate).  In addition, the Amendment allowed for over advances in excess
of the existing availability collateral formulas of up to five hundred thousand
dollars during the term of the loan facility.  The Amendment was
subject to the bank receiving, on or before October 15, 2009, a fully executed
asset purchase agreement or merger agreement satisfactory to the bank, in its
reasonable business judgment, for the sale or merger of Wegener Corporation to
or into a third-party purchaser; provided, however, the failure to provide such
fully executed asset purchase or merger agreement to the bank on or before
October 15, 2009 would have been an automatic Event of Default as defined and
set forth in the Loan Agreement, and the bank would have all of its rights and
remedies as provided for in the Loan Agreement without further
notice.  At August 28, 2009, we were in violation of the bank’s
tangible net worth debt covenant.




On
October 8, 2009, the bank assigned its rights (the “Assignment”) under the Loan
Agreement to The David E. Chymiak Trust Dated December 15, 1999 (the
“Trust”).  Immediately before becoming such assignee, the Trust
entered into a twelfth amendment to the Loan Agreement, dated October 8, 2009
(the “Twelfth Amendment”) which became effective immediately upon the
consummation of the Assignment.  Accordingly, by virtue of the
Assignment, the Trust succeeded to all the rights and obligations of the bank
under the Loan Agreement, except as otherwise provided in the Twelfth Amendment.
In connection with the Assignment, the Trust paid a total of $2,941,000 to the
bank amounting to all amounts we owed to the bank.  Therefore, we no
longer have a lending relationship with the bank. (See Note 8 to the
Consolidated Financial Statements).





Among
other things, the Twelfth Amendment provides a maximum loan limit of four
million dollars (the “Loan Limit”), excluding any accrued unpaid
interest.  The term of the Loan Agreement is eighteen (18) months
beginning October 8, 2009 (“Original Term”), or upon demand in the event of
default as provided by the Loan Agreement. The outstanding loan balance bears
interest at the rate of twelve percent (12%) per annum.  The Twelfth
Amendment automatically renews for successive twelve (12) month periods
provided, however, the Trust may terminate the Loan Agreement by providing the
Borrower ninety (90) days’ prior written notice of termination at any time
beginning on or after ninety (90) days prior to the expiration of the Original
Term. Principal and interest shall be payable upon the earlier of the maturity
date, an event of default, or 90 days  following the date on which the
Trust provides written notice to terminate the agreement.  All
principal and interest shall be payable in U.S. dollars and/or such other good
and valuable consideration as the parties may agree in good faith at the time
payment is due.  The Twelfth Amendment removed collateral availability
advance formula provisions which limited the maximum borrowing to the amount of
available collateral and the 2.0% annual facility fee provision. In addition, it
removed the minimum tangible net worth and minimum fixed coverage ratio annual
debt covenant provisions. The Twelfth Amendment suspended the Loan Agreement’s
solvency representation provision until the last day of our third quarter of
fiscal 2010 (May 28, 2010). This representation requires the company to be able
to pay its debts as they become due, have sufficient capital to carry on its
business and own property at a fair saleable value greater than the amount
required to pay its debts.  In addition the Company is required to
retain certain executive officers.





On
October 1, 2009, we entered into an unsecured promissory note with David E.
Chymiak in the amount of two hundred and fifty thousand dollars
($250,000).  The loan bears interest at the rate of 8.0% per year and
had an initial maturity date of October 31, 2009. The maturity date was
subsequently extended to May 31, 2010.





The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern.  The audit report
relating to the consolidated financial statements for the year ended August 28,
2009, contains an explanatory paragraph regarding the Company’s ability to
continue as a going concern.




24


Financing
Agreements





WCI’s
loan facility, amended and effective October 8, 2009, consists of a revolving
line of credit and term loan with a maximum combined available credit limit of
$4,000,000 (previously $5,000,000 during fiscal 2009).  The term of
the amended loan facility is eighteen (18) months beginning October 8, 2009
(“Original Term”), or upon demand in the event of default as provided by the
loan facility.  The outstanding loan balance bears interest at the
rate of twelve percent (12%) per annum (previously at our former bank’s prime
and effective September 16, 2009, bank’s prime plus 2.0%).  The loan
facility automatically renews for successive twelve (12) month periods provided,
however, the lender may terminate the facility by providing ninety (90) days’
prior written notice of termination at any time beginning on or after ninety
(90) days prior to the expiration of the Original Term.  Principal and
interest shall be payable upon the earlier of the maturity date, an event of
default, or 90 days  following the date on which the Trust provides
written notice to terminate the agreement.  All principal and interest
shall be payable in U.S. dollars or, upon mutual agreement of the parties
decided in good faith at the time payment is due, other good and valuable
consideration.





The loan
is secured by a first lien on substantially all of WCI’s assets, including land
and buildings, and is guaranteed by Wegener Corporation.  At February
26, 2010, the outstanding balance on the line of credit was at the maximum
credit limit of $4,000,000.  At April 1, 2010, the outstanding balance
on the line of credit remained at $4,000,000 and our cash balances were
approximately $443,000, net of outstanding checks of approximately
$193,000.





The loan
facility requires us to be in compliance with certain representations,
warranties and covenants.   Among which, we are required by May
28, 2010 to be in compliance with the solvency representation provision. This
representation requires us to be able to pay our debts as they become due, have
sufficient capital to carry on our business and own property at a fair saleable
value greater than the amount required to pay our debts.  No
assurances may be given that we will be in compliance with the solvency
provision by May 28, 2010.  In addition, we are required to retain
certain executive officers and are precluded from paying dividends.





On
October 1, 2009, we entered into an unsecured promissory note with David E.
Chymiak in the amount of two hundred and fifty thousand dollars
($250,000).  The loan bears interest at the rate of 8.0% per year and
had an initial maturity date of October 31, 2009. The maturity date was
subsequently extended to May 31, 2010.





Cash
Flows





During
the first six months of fiscal 2010, operating activities used $345,000 of
cash.  Net earnings adjusted for expense provisions and depreciation
and amortization (before working capital changes) used $868,000 of
cash.  Changes in accounts receivable, deferred revenue and customer
deposit balances used $57,000 of cash. Changes in accounts payable and accrued
expenses used $133,000 of cash, while changes in inventories and other assets
provided $713,000 of cash.  Cash used by investing activities was
$434,000, which consisted of capitalized software additions of $425,000, legal
fees related to the filing of applications for various patents and trademarks of
$3,000 and equipment additions of $6,000.  Financing activities
provided $1,451,000 of cash from net line of credit borrowings.





We have
one manufacturing and purchasing agreement for certain finished goods
inventories. At February 26, 2010, outstanding purchase commitments under this
agreement amounted to $575,000.





The
Company has never paid cash dividends on its common stock and does not intend to
pay cash dividends in the foreseeable future.




A summary
of the Company’s long-term contractual obligations as of February 26, 2010 consisted
of:




Payments Due by PeriodContractual Obligations
                  
                  Total
                  
                  
                  Fiscal
                    2010
                  
                  
                  Fiscal
                    2011-2012
                  
                  
                  Fiscal
                    2013-2014Operating
      leases
                  
                  $
                  197,000
                  
                  
                  $
                  38,000
                  
                  
                  $
                  132,000
                  
                  
                  $
                  27,000Line
      of credit and note payable
                  
                  
                  4,250,000
                  
                  
                  
                  4,250,000
                  
                  
                  
                  -
                  
                  
                  
                  -Purchase
      commitments
                  
                  
                  575,000
                  
                  
                  
                  575,000
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  5,022,000
                  
                  
                  $
                  4,863,000
                  
                  
                  $
                  132,000
                  
                  
                  $
                  27,000




25


CRITICAL
ACCOUNTING POLICIES





Certain
accounting policies are very important to the portrayal of our financial
condition and results of operations and require management’s most subjective or
difficult judgements.  These policies are as follows:





Revenue
Recognition – Our revenue recognition policies are in compliance with ASC
Topic 605 “Revenue Recognition.”  Revenue is recognized when
persuasive evidence of an agreement with the customer exists, products are
shipped or title passes pursuant to the terms of the agreement with the
customer, the amount due from the customer is fixed or determinable,
collectibility is reasonably assured, and when there are no significant future
performance obligations.  Service revenues are recognized at the time
of performance. Extended service maintenance contract revenues are recognized
ratably over the maintenance contract term, which is typically one year. The
unrecognized revenue portion of maintenance contracts invoiced is recorded as
deferred revenue.  At February 26, 2010, deferred extended service
maintenance revenues were $492,000 and deferred revenues related to the fair
value of future performance obligations were $10,000 and are expected to be
recognized as revenue in varying amounts throughout fiscal 2010 and into fiscal
2011.





We
recognize revenue in certain circumstances before delivery has occurred
(commonly referred to as “bill and hold” transactions).  In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods be held for future delivery as
scheduled and designated by them, and no additional performance obligations
exist by the Company.  For these transactions, the finished goods are
segregated from inventory and normal billing and credit terms are
granted.  For the three and six months ended February 26, 2010, no
revenues were recorded as bill and hold transactions.





These
policies require management, at the time of the transaction, to assess whether
the amounts due are fixed or determinable, collection is reasonably assured, and
if future performance obligations exist.  These assessments are based
on the terms of the agreement with the customer, past history and credit
worthiness of the customer.  If management determines that collection
is not reasonably assured or future performance obligations exist, revenue
recognition is deferred until these conditions are satisfied.





Our
principal sources of revenue are from the sales of various satellite
communications equipment.  Embedded in the Company’s products is
internally developed software of varying applications.  We evaluate
our products to assess whether software is more than incidental to a
product.  When we conclude that software is more than incidental to a
product, we will account for the product as a software product. Revenue on
software products and software-related elements is recognized in accordance with
ASC Topic 985-605 “Software-Revenue Recognition.”  Significant
judgment may be required in determining whether a product is a software or
hardware product.





Inventory
Reserves-Inventories are valued at the lower of cost (at standard cost, which
approximates actual cost on a first-in, first-out basis) or
market.  Inventories include the cost of raw materials, labor and
manufacturing overhead.  We make inventory reserve provisions for
obsolete or slow-moving inventories as necessary to properly reflect inventory
value.  These reserves are to provide for items that are potentially
slow-moving, excess or obsolete.  Changes in market conditions, lower
than expected customer demand and rapidly changing technology could result in
additional obsolete and slow-moving inventory that is unsaleable or saleable at
reduced prices, which could require additional inventory reserve
provisions.  At February 26, 2010, inventories, net of reserve
provisions, amounted to $3,650,000.





Capitalized
Software Costs-Software development costs are capitalized subsequent to establishing
technological feasibility.  Capitalized costs are amortized based on
the larger of the amounts computed using (a) the ratio that current gross
revenues for each product bears to the total of current and anticipated future
gross revenues for that product, or (b) the straight-line method over the
remaining estimated economic life of the product.  Expected future
revenues and estimated economic lives are subject to revisions due to market
conditions, technology changes and other factors resulting in shortfalls of
expected revenues or reduced economic lives, which could result in additional
amortization expense or write-offs.  At February 26, 2010, capitalized
software costs, net of accumulated amortization, amounted to
$1,267,000.





Deferred
Tax Asset Valuation Allowance – Deferred tax assets are recognized for
deductible temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits will be
realized.  Realization of our deferred tax assets depends on
generating sufficient future taxable income prior to the expiration of the loss
and credit carryforwards.  At February 26, 2010, net deferred tax
assets of $7,161,000 were fully reserved by a valuation allowance. For the six
months ended February 26, 2010, the valuation allowance was increased by
$544,000.


26





Accounts
Receivable Valuation – We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments.  If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required.  At February 26, 2010,
accounts receivable, net of allowances for doubtful accounts, amounted to
$1,445,000.





ITEM
3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK




Our
exposure to market rate risk for changes in interest rates during a portion of
the first six months of fiscal 2010 related primarily to our revolving line of
credit facility.  The interest rate on certain advances under the line
of credit and term loan facility fluctuated with the bank’s prime rate and
effective September 16, 2009 the bank’s prime rate plus 2.0% (bank’s prime rate
3.25% at August 28, 2009).  Effective October 8, 2009, the amended
line of credit carried a fixed interest rate of 12.0% and an unsecured
promissory note dated October 1, 2009, carried a fixed rate of interest of
8.0%.




ITEM
4.          CONTROLS AND
PROCEDURES




Not applicable





ITEM
4T.        CONTROLS AND
PROCEDURES




The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures as of the end
of the period covered by this report (February 26, 2010).  Based upon
that evaluation, the Company’s CEO and CFO have concluded that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended) are effective. There has
been no change in the Company’s internal control over financial reporting during
our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





PART II.  OTHER
INFORMATION





ITEM
1A.    RISK FACTORS





Our
operations and financial results are subject to various risks and uncertainties
that could adversely affect our business, financial condition, results of
operations, and the market price for our Common Stock. Part I,
Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for
the year ended August 28, 2009, includes a detailed discussion of these factors
which have not changed materially from those included in the Form 10-K, other
than as set forth below.




We
may not have sufficient capital to continue as a going concern and our line of
credit balance at February 26, 2010 has reached the maximum available credit
limit of $4,000,000.




Bookings
and revenues during fiscal 2009 and in fiscal 2010 to date were insufficient to
provide adequate levels of cash flow from operations. As a result our line of
credit borrowings have increased to the maximum available credit limit of
$4,000,000.  Our near term liquidity and ability to continue as a
going concern is dependent on our ability to collect our existing accounts
receivable and to generate sufficient new orders and revenues in the near term
to provide adequate cash flow from operations to pay our operating
expenses.  Should increased revenues not materialize, we would need to
further reduce operating costs to bring them in line with reduced revenue
levels.  Should we be unable to achieve near term profitability and
generate sufficient cash flow from operations and if we are unable to
sufficiently reduce operating costs, we would need to raise additional capital
or increase our borrowings. No assurances can be given that operating costs can
be sufficiently reduced, or if required, that additional capital or borrowings
would be available to allow us to continue as a going concern.  See also Note 1 to the
Consolidated Financial Statements and “MD&A- Liquidity and Capital
Rescources.”





We
do not expect to be able to comply with the listing requirements of The Nasdaq
Stock Market (“Nasdaq”) which would result in Nasdaq delisting our securities,
which could limit investors’ ability to trade in our securities and our ability
to raise additional capital.





On
December 9, 2009, we received a letter (the “December 9th
Letter”) from Nasdaq indicating that the Company’s securities would be delisted
from Nasdaq at the opening of business on December 16, 2009 and a Form 25-NSE
would be filed with the Securities and Exchange Commission (the “Commission”)
which would remove the Company’s securities from listing and registration on
Nasdaq.  However, the December 9th Letter
also indicated that an official appeal by the Company to the Nasdaq Hearing
Panel (the “Panel”) would stay the suspension of the Company’s securities and
the filing of the Form 25-NSE pending the Panel’s determination.  On
December 11, 2009, the Company officially filed an appeal with the
Panel.


27




On
February 17, 2010, the Company received notification from Nasdaq (the
“Notification”), that as a result of the information presented by the Company at
the appeal hearing held on January 13, 2010, the Panel granted the Company’s
request to remain listed on Nasdaq subject to conditions stipulated in the
Notification.





The
Notification stipulated that on or before June 7, 2010 (the “Exception
Deadline”), the Company is required to be compliant with Listing Rule 5550(b)
which requires stockholders’ equity of at least $2,500,000 or the Company
meeting the listing alternatives of (i) a market value of listed securities of
$35 million, or (ii) net income from continuing operations of $500,000 in the
most recently completed fiscal year or in two of the last three most recently
completed fiscal years. In addition, the Company is required to be compliant
with Marketplace Rule 4320, (current Listing Rule 5550(a) (2)), which requires
the Company’s common stock to maintain a minimum bid price of $1.00 per share.
In order to regain such compliance, the Company’s common stock must maintain a
minimum closing bid price of $1.00 per share for a period of ten consecutive
trading days or beyond ten trading days at the determination of the
Panel.





Should
the Company not be able to meet both requirements by the Exception Deadline, the
Panel would issue a final determination to delist the Company’s shares and would
suspend trading on Nasdaq effective on the second business day from the date of
the final determination.





The
Company is required to notify the Panel of any significant events occurring
prior to June 7, 2010, including, without limitation, any event that may call
into question the Company’s historical financial information or that may impact
the Company’s ability to maintain compliance with any Nasdaq listing requirement
or the Exception Deadline.  The Panel reserved the right to reconsider
their decision based on any event, condition or circumstance that exists or
develops that would, in the opinion of the Panel, make continued listing of the
Company’s common stock inadvisable or unwarranted.





On April
8, 2010, we notified the Panel that based on our current level of existing
backlog of orders scheduled to ship in our fiscal third quarter ending May 28,
2010, and our expected level of new shippable bookings for the third quarter, we
do not expect that we will be able to comply with the Nasdaq requirements by the
Exception Deadline.  As a result, we expect that the Panel would issue
a final determination to delist the Company’s shares.





Delisting
of our common stock by Nasdaq, would likely adversely affect the trading market
for our common stock, as price quotations may not be as readily obtainable,
which would likely have a material adverse effect on the market price of our
common stock and the Company’s ability to raise
additional  capital.





ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




On
February 2, 2010, the Annual Meeting of Shareholders was held and the shares
present voted on the following matters:





(1.)
            The
      shareholders approved the election of the following nominees to the Board
      of Directors to hold office until the 2013 annual meeting of stockholders
      or until their successors shall have been elected and
      qualified:





Stephen J. Lococo (Class III
Director)


6,315,287
votes for


418,260
votes withheld


5,506,265
broker non-votes





Thomas G. Elliot (Class III
Director)


6,489,108 votes
for


244,439
votes withheld


5,506,265
broker non-votes


28





(2.)
            The
      Company’s 2010 Incentive Plan was approved with 5,803,835 votes for,
      917,117 votes against, and 12,595 votes abstaining.  Broker
      non-votes 5,506,265.





(3.)
            An
      amendment to the Company’s Certificate of Incorporation allowing the
      Company to effect a reverse stock split of all the Company’s issued and
      outstanding shares of common stock at an exchange ratio between and
      including twelve-for-one and twenty-for-one was approved with 10,184,830
      votes for, 2,037,333 votes against, and 17,649 votes
      abstaining.





(4.)
            The
      appointment of BDO Seidman, LLP to serve as the Company’s independent
      registered public accounting firm for fiscal 2010 was ratified with
      11,985,345 votes for, 211,474 votes against, and 42,993 votes
      abstaining.





ITEM
6.   EXHIBITS





The
following documents are filed as exhibits to this report.  An asterisk
identifies those exhibits previously filed and incorporated herein by
reference.  For each such asterisked exhibit there is shown below the
description of the prior filing.  Exhibits which are not required for
this report are omitted.





Exhibit No.
            
            
            
            Description of Exhibit3.1
            *
            
            
            Certificate
      of Incorporation as amended through May 4, 1989. (1)3.1.1
            *
            
            
            Amendment
      to Certificate of Incorporation. (2)3.2
            *
            
            
            By-laws
      of the Company, as Amended and Restated May 17, 2006.
  (3)10.1
            
            
            
            2010
      Incentive Plan31.1
            
            
            
            Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            
            
            Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            
            
            Certification
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
            
            
            
            Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





(1)
                
                Incorporated
      by reference to the Company's Annual Report on Form 10-K for the fiscal
      year ended September 1, 1989, as filed with the Commission on November 30,
      1989.+(2)
                
                Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the
      quarter ended May 30, 1997, as filed with the Commission on June 30,
      1997.+(3)
                
                Incorporated
      by reference to the Company's Current Report on Form 8-K, dated May 17,
      2006, as filed with the Commission on May 22, 2006.++
                
                SEC
      file No. 0-11003




29





SIGNATURES




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





WEGENER
      CORPORATION(Registrant)Date:  April
      12, 2010
                    By:
                    /s/
      C. Troy Woodbury, Jr.C.
      Troy Woodbury, Jr.President
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      April 12, 2010
                    By:
                    /s/
      James TraicoffJames
      TraicoffTreasurer
      and ChiefFinancial
      Officer(Principal
      Financial and Accounting
Officer)




30