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 November 27, 2009
  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 December 29, 2009
  
  WEGENER
CORPORATION AND SUBSIDIARIES
 Form
10-Q For the Quarter Ended November 27, 2009
 
 INDEX
 
 PagePART
      I.  Financial InformationItem
      1.
                                    Financial
      StatementsIntroduction
                                    
                                    3Consolidated
      Statements of Operations(Unaudited)
      - Three Months EndedNovember
      27, 2009 and November 28, 2008
                                    
                                    4Consolidated
      Balance Sheets (Unaudited) – November 27,2009
      and August 28, 2009
                                    
                                    5Consolidated
      Statements of Shareholders' Equity(Unaudited)
      - Three Months Ended November 27,2009
      and November 28, 2008
                                    
                                    6Consolidated
      Statements of Cash Flows(Unaudited)
      - Three Months Ended November 27,2009
      and November 28, 2008
                                    
                                    7Notes
      to Consolidated FinancialStatements
      (Unaudited)
                                    
                                    8Item
      2.
                                    Management's
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                                    
                                    17Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    
                                    24Item
      4.
                                    Controls
      and Procedures
                                    
                                    24Item
      4T.
                                    Controls
      and Procedures
                                    
                                    24PART
      II.  Other InformationItem
      1A.
                                    Risk
      Factors
                                    
                                    25Item
      6.
                                    Exhibits
                                    
                                    26Signatures
                                    
                                    27
  2
  PART I.  FINANCIAL
INFORMATION
 
 Item 1.  Financial
Statements
 
 INTRODUCTION
- CONSOLIDATED FINANCIAL STATEMENTS
 
 The
consolidated financial statements included herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The
consolidated balance sheet as of November 27, 2009; the consolidated statements
of shareholders' equity as of November 27, 2009 and November 28, 2008; the
consolidated statements of operations for the three months ended November 27,
2009 and November 28, 2008; and the consolidated statements of cash flows for
the three months ended November 27, 2009 and November 28, 2008 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 consolidated financial statements be read
in conjunction with the 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.
 
 In the
opinion of management 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 SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three
      months endedNovember
      27,
                                                                                  2009
                                                                                
                                                                                
                                                                                November
      28,
                                                                                  2008Revenues,
      net
                                                                                
                                                                                $
                                                                                1,917,785
                                                                                
                                                                                
                                                                                $
                                                                                2,322,778Operating
      costs and expensesCost
      of products sold
                                                                                
                                                                                
                                                                                1,494,034
                                                                                
                                                                                
                                                                                
                                                                                1,698,415Selling,
      general, and administrative
                                                                                
                                                                                
                                                                                961,675
                                                                                
                                                                                
                                                                                
                                                                                1,169,682Research
      and development
                                                                                
                                                                                
                                                                                374,067
                                                                                
                                                                                
                                                                                
                                                                                608,621Operating
      costs and expenses
                                                                                
                                                                                
                                                                                2,829,776
                                                                                
                                                                                
                                                                                
                                                                                3,476,718Operating
      loss
                                                                                
                                                                                
                                                                                (911,991
                                                                                )
                                                                                
                                                                                
                                                                                (1,153,940
                                                                                )Interest
      expense
                                                                                
                                                                                
                                                                                (78,419
                                                                                )
                                                                                
                                                                                
                                                                                (38,928
                                                                                )Other
      income
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                129Net
      loss
                                                                                
                                                                                $
                                                                                (990,410
                                                                                )
                                                                                
                                                                                $
                                                                                (1,192,739
                                                                                )Net
      loss per share:Basic
      and diluted
                                                                                
                                                                                $
                                                                                (.08
                                                                                )
                                                                                
                                                                                $
                                                                                (.09
                                                                                )Shares
      used in per share calculationBasic and
      diluted
                                                                                
                                                                                
                                                                                12,647,051
                                                                                
                                                                                
                                                                                
                                                                                12,647,051
 
 See
accompanying notes to consolidated financial statements.
  4


WEGENER
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





November
      27,
                        2009
                      
                      
                      August
      28,
                        2009AssetsCurrent
      assetsCash
                      
                      $
                      85,556
                      
                      
                      $
                      3,476Accounts
      receivable, net
                      
                      
                      1,571,027
                      
                      
                      
                      1,581,926Inventories,
      net
                      
                      
                      4,118,368
                      
                      
                      
                      4,463,586Other
      current assets
                      
                      
                      134,818
                      
                      
                      
                      171,676Total
      current assets
                      
                      
                      5,909,769
                      
                      
                      
                      6,220,664Property
      and equipment, net
                      
                      
                      1,652,578
                      
                      
                      
                      1,720,031Capitalized
      software costs, net
                      
                      
                      1,266,980
                      
                      
                      
                      1,265,445Other
      assets
                      
                      
                      295,298
                      
                      
                      
                      335,557Total
      assets
                      
                      $
                      9,124,625
                      
                      
                      $
                      9,541,697Liabilities
      and Shareholders’ EquityCurrent
      liabilitiesLine
      of credit and note payable
                      
                      $
                      3,941,041
                      
                      
                      $
                      2,799,088Accounts
      payable
                      
                      
                      1,280,537
                      
                      
                      
                      1,964,367Accrued
      expenses
                      
                      
                      1,648,232
                      
                      
                      
                      1,523,925Deferred
      revenue
                      
                      
                      541,203
                      
                      
                      
                      568,673Customer
      deposits
                      
                      
                      522,330
                      
                      
                      
                      503,952Total
      current liabilities
                      
                      
                      7,933,343
                      
                      
                      
                      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
                      
                      
                      (18,941,891
                      )
                      
                      
                      (17,951,481
                      )Total
      shareholders’ equity
                      
                      
                      1,191,282
                      
                      
                      
                      2,181,692Total
      liabilities and shareholders’ equity
                      
                      $
                      9,124,625
                      
                      
                      $
                      9,541,697





See
accompanying notes to consolidated financial statements.


5


WEGENER
CORPORATION AND SUBSIDIARIES


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 three months
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,192,739
                        )BALANCE
      at November 28, 2008
                        
                        
                        12,647,051
                        
                        
                        $
                        126,471
                        
                        
                        $
                        20,006,702
                        
                        
                        $
                        (16,538,521
                        )Balance
      at August 28, 2009
                        
                        
                        12,647,051
                        
                        
                        $
                        126,471
                        
                        
                        $
                        20,006,702
                        
                        
                        $
                        (17,951,481
                        )Net
      loss for the three months
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (990,410
                        )BALANCE
      at November 27, 2009
                        
                        
                        12,647,051
                        
                        
                        $
                        126,471
                        
                        
                        $
                        20,006,702
                        
                        
                        $
                        (18,941,891
                        )
  See
accompanying notes to consolidated financial statements.


6




WEGENER
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three months endedNovember 27,2009
                                                      
                                                      
                                                      November 28,2008Cash
      flows from operating activitiesNet
      loss
                                                      
                                                      $
                                                      (990,410
                                                      )
                                                      
                                                      $
                                                      (1,192,739
                                                      )Adjustments
      to reconcile net loss tocash
      used for operating activitiesDepreciation
      and amortization
                                                      
                                                      
                                                      320,657
                                                      
                                                      
                                                      
                                                      382,138Increase
      in provision for bad debts
                                                      
                                                      
                                                      15,000
                                                      
                                                      
                                                      
                                                      15,000Increase
      in provision for inventory reserves
                                                      
                                                      
                                                      15,000
                                                      
                                                      
                                                      
                                                      -Changes
      in assets and liabilitiesAccounts
      receivable
                                                      
                                                      
                                                      (4,101
                                                      )
                                                      
                                                      
                                                      1,057,042Inventories
                                                      
                                                      
                                                      330,218
                                                      
                                                      
                                                      
                                                      (116,308
                                                      )Other
      assets
                                                      
                                                      
                                                      36,858
                                                      
                                                      
                                                      
                                                      (671
                                                      )Accounts
      payable
                                                      
                                                      
                                                      (683,830
                                                      )
                                                      
                                                      
                                                      (675,531
                                                      )Accrued
      expenses
                                                      
                                                      
                                                      124,307
                                                      
                                                      
                                                      
                                                      (332,953
                                                      )Deferred
      revenue
                                                      
                                                      
                                                      (27,470
                                                      )
                                                      
                                                      
                                                      (226,471
                                                      )Customer
      deposits
                                                      
                                                      
                                                      18,378
                                                      
                                                      
                                                      
                                                      (78,405
                                                      )Net
      cash used for operating activities
                                                      
                                                      
                                                      (845,393
                                                      )
                                                      
                                                      
                                                      (1,168,898
                                                      )Cash
      flows from investment activitiesProperty
      and equipment expenditures
                                                      
                                                      
                                                      (2,219
                                                      )
                                                      
                                                      
                                                      -Capitalized
      software additions
                                                      
                                                      
                                                      (212,261
                                                      )
                                                      
                                                      
                                                      (254,150
                                                      )License
      agreement, patent, and trademarkexpenditures
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (6,192
                                                      )Net
      cash used for investing activities
                                                      
                                                      
                                                      (214,480
                                                      )
                                                      
                                                      
                                                      (260,342
                                                      )Cash
      flows from financing activitiesNet
      change in borrowings under line of creditand
      note payable
                                                      
                                                      
                                                      1,141,953
                                                      
                                                      
                                                      
                                                      1,431,162Net
      cash provided by financing activities
                                                      
                                                      
                                                      1,141,953
                                                      
                                                      
                                                      
                                                      1,431,162Increase
      in cash
                                                      
                                                      
                                                      82,080
                                                      
                                                      
                                                      
                                                      1,922Cash,
      beginning of period
                                                      
                                                      
                                                      3,476
                                                      
                                                      
                                                      
                                                      8,023Cash,
      end of period
                                                      
                                                      $
                                                      85,556
                                                      
                                                      
                                                      $
                                                      9,945Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
                                                      
                                                      $
                                                      15,616
                                                      
                                                      
                                                      $
                                                      38,928





See
accompanying notes to consolidated financial statements.


7


WEGENER
CORPORATION AND SUBSIDIARIES


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 $18,942,000 at November 27,
2009.  We had a working capital deficit of approximately $2,024,000 at
November 27, 2009 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 quarter of fiscal 2010 were financed by our
loan facility and an unsecured promissory note. Our combined net borrowings
increased $1,142,000 to $3,941,000 at November 27, 2009 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
December 29, 2009, 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 $374,000, net of outstanding checks of approximately
$312,000.




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 quarter of fiscal 2010, we made further
reductions in headcount to bring the current number of employees to 51. 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 quarter of fiscal 2010 bookings were approximately $1.8 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 $4.2 million
at November 27, 2009, compared to $4.3 million at August 28, 2009, and $8.1
million at November 28, 2008.  The total multi-year backlog at
November 27, 2009 was approximately $6.6 million, compared to $6.8 million at
August 28, 2009 and $12.5 million at November 28, 2008.Approximately
$3.1 million of the November 27, 2009 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 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





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.




In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (FAS) No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FAS 162.” The new standard establishes only two levels of U.S.
GAAP, authoritative and nonauthoritative. The FASB Accounting Standards
Codification (ASC) became the single source of authoritative, nongovernmental
U.S. GAAP, except for rules and interpretive releases of the Securities and
Exchange Commission (SEC), which will continue to be sources of authoritative
U.S. GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting
literature not included in the ASC became nonauthoritative upon adoption. The
new guidance became effective for our first quarter of fiscal 2010. Since the
new standard did not change U.S. GAAP, there was no change to our consolidated
financial statements other than to update all references to U.S. GAAP to be in
conformity with the ASC.





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 November 27,
2009, deferred extended service maintenance revenues were $462,000 and deferred
revenues related to future performance obligations were $79,000 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 to be held for future delivery as
scheduled and designated by the buyer, and no additional performance obligations
by the Company exist.  For these transactions, the finished goods are
segregated from inventory and normal billing and credit terms are
granted.  For the three months ended November 27, 2009, 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
no future performance obligations exist.  These assessments are based
on the terms of the agreement with the customer, past history and
creditworthiness 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.




9




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.





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 months ended November 27, 2009 and November 28, 2008, there was no
stock-based compensation expense. No options were granted during the three
months ended November 27, 2009.





The
following table summarizes stock option transactions for the three months ended
November 27, 2009:





Number
                                    of Shares
                                  
                                  
                                  Range of
                                    ExercisePrices
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise PriceOutstanding
      at August 28, 2009
                                  
                                  
                                  731,375
                                  
                                  
                                  $
                                  .63
      – 2.50
                                  
                                  
                                  $
                                  1.42Forfeited
      or cancelled
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Outstanding
      at November 27, 2009
                                  
                                  
                                  731,375
                                  
                                  
                                  $
                                  .63
      – 2.50
                                  
                                  
                                  $
                                  1.42Available
      for issue at November 27, 2009
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Options
      exercisable atNovember
      27, 2009
                                  
                                  
                                  731,375
                                  
                                  
                                  $
                                  .63
      – 2.50
                                  
                                  
                                  $
                                  1.42August
      28, 2009
                                  
                                  
                                  731,375
                                  
                                  
                                  $
                                  .63
      – 2.50
                                  
                                  
                                  $
                                  1.42





The key
terms of the stock options granted under our incentive plans are included in the
Company's Annual Report on Form 10-K for the fiscal year ended August 28,
2009.





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.  At November 27, 2009, outstanding checks in the amount of
$188,000 were offset against cash balances.





Use
of Estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Examples include provisions for bad debts, inventory obsolescence and
warranties.  Actual results could vary from these
estimates.





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
November 27, 2009, approximated market interest rates.





Subsequent
Events


We have reviewed and evaluated
material subsequent events from the balance sheet date of November 27, 2009
through the financial statements issue date of January 11, 2010. All
appropriate subsequent event disclosures, if any, have been made in the notes to
our Consolidated Financial Statements.





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.




10




Note
3 Accounts Receivable


Accounts
receivable are summarized as follows:





(Unaudited)November 27,
                                2009
                              
                              
                              August 28,
                                2009Accounts
      receivable – trade
                              
                              $
                              1,584,098
                              
                              
                              $
                              1,649,047Other
      receivables
                              
                              
                              78,889
                              
                              
                              
                              78,8891,662,987
                              
                              
                              
                              1,727,936Less
      allowance fordoubtful
      accounts
                              
                              
                              (91,960
                              )
                              
                              
                              (146,010
                              )Accounts
      receivable, net
                              
                              $
                              1,571,027
                              
                              
                              $
                              1,581,926





Note
4 Inventories


Inventories
are summarized as follows:





(Unaudited)November 27,
                                  2009
                                
                                
                                August 28,
                                  2009Raw
      material
                                
                                $
                                4,412,446
                                
                                
                                $
                                4,430,492Work-in-process
                                
                                
                                917,442
                                
                                
                                
                                958,658Finished
      goods
                                
                                
                                3,492,622
                                
                                
                                
                                3,763,7938,822,510
                                
                                
                                
                                9,152,943Less
      inventory reserves
                                
                                
                                (4,704,142
                                )
                                
                                
                                (4,689,357
                                )Inventories,
      net
                                
                                $
                                4,118,368
                                
                                
                                $
                                4,463,586





Our
inventory reserve of approximately $4,704,000 at November 27, 2009 is 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.  No estimate can be made of a range of amounts of loss from
obsolescence that is reasonably possible should our sales efforts not be
successful.





Note
5 Other Assets (Unaudited)


Other
assets consist of the following:





November 27, 2009Cost
                          
                          
                          Accumulated
                            Amortization
                          
                          
                          NetLicense
      agreements
                          
                          $
                          958,800
                          
                          
                          $
                          (958,800
                          )
                          
                          $
                          -Patents
      and patent applications
                          
                          
                          353,057
                          
                          
                          
                          (90,478
                          )
                          
                          
                          262,579Trademarks
                          
                          
                          82,820
                          
                          
                          
                          (56,990
                          )
                          
                          
                          25,830Loan
      facility fees
                          
                          
                          25,000
                          
                          
                          
                          (25,000
                          )
                          
                          
                          -Other
                          
                          
                          6,889
                          
                          
                          
                          -
                          
                          
                          
                          6,889$
                          1,426,566
                          
                          
                          $
                          (1,131,268
                          )
                          
                          $
                          295,298





11




August 28, 2009Cost
                            
                            
                            Accumulated
                              Amortization
                            
                            
                            NetLicense
      agreements
                            
                            $
                            958,800
                            
                            
                            $
                            (953,384
                            )
                            
                            $
                            5,416Patents
      and patent applications
                            
                            
                            353,057
                            
                            
                            
                            (66,799
                            )
                            
                            
                            286,258Trademarks
                            
                            
                            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 months ended November 27, 2009 amounted to
$40,000.  Amortization expense of other assets for the three months
ended November 28, 2008 amounted to $40,000.





We
conduct an ongoing review of our intellectual property rights and potential
trademarks.  As of November 27, 2009, we have cumulatively incurred
$228,000 of legal fees related to the filing of applications for various patents
and $1,000 related to the filing of trademark applications.  Upon
issuance, these costs will be amortized on a straight-line basis over the lesser
of the legal life or their estimated useful lives.  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 November 27, 2009, the
cost of registered patents and trademarks amounted to $126,000 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:





(Unaudited)November 27,
                                  2009
                                
                                
                                August 28,
                                  2009Vacation
                                
                                $
                                547,708
                                
                                
                                $
                                530,652Payroll
      and related expenses
                                
                                
                                295,168
                                
                                
                                
                                223,319Royalties
                                
                                
                                182,035
                                
                                
                                
                                161,247Warranty
                                
                                
                                94,757
                                
                                
                                
                                98,882Taxes
      and insurance
                                
                                
                                102,994
                                
                                
                                
                                154,035Commissions
                                
                                
                                31,516
                                
                                
                                
                                31,516Professional
      fees
                                
                                
                                236,800
                                
                                
                                
                                290,072Interest
                                
                                
                                62,803
                                
                                
                                
                                -Other
                                
                                
                                94,451
                                
                                
                                
                                34,202$
                                1,648,232
                                
                                
                                $
                                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.  Accrued warranty liabilities amounted
to $95,000 at November 27, 2009 and $99,000 at August 28, 2009.  For
the three months ended November 27, 2009, no additional warranty provisions were
made and $4,000 for satisfied warranty claims were charged to the
accrual.





Note
7 Deferred Revenue


Deferred
revenue consists of the unrecognized revenue portion of extended service
maintenance contracts and estimates 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 November 27, 2009, deferred extended service maintenance
revenues were $462,000 and deferred revenues related to future performance
obligations were $79,000 and are expected to be recognized as revenue in varying
amounts throughout fiscal 2010 and into fiscal 2011.


12




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 formulas 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.





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 November
27, 2009, balances outstanding on the revolving line of credit amounted to
$3,691,000.  At December 29, 2009, 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 $374,000, net of
outstanding checks of approximately $312,000.





During
fiscal 2010 we expect the average daily balance to increase and interest expense
to increase due to the significant increase in the annual interest
rate.





The amendedloan facilityrequires 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, weare required to retain certain
executive officers and are precluded from paying
dividends.TheTwelfthAmendmentremoved 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.




13




Note
9 Income Taxes


For the
three months ended November 27, 2009, no income tax benefit was recorded due to
an increase in the deferred tax asset valuation allowance.  The
valuation allowance increased $357,000 in the first quarter of fiscal
2010.  At November 27, 2009, net deferred tax assets of $6,974,000
were fully reserved by a valuation allowance.





At
November 27, 2009, we had a federal net operating loss carryforward of
approximately $12,788,000, 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.





Note
10 Earnings Per Share (Unaudited)


The
following table presents required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net (loss) earnings per
share computations.  The calculation of earnings per share is subject
to rounding differences.





Three months endedNovember 27, 2009
                      
                      
                      November 28, 2008Earnings
                        (Numerator)
                      
                      
                      Shares
                        (Denominator)
                      
                      
                      Per
                        share
                        amount
                      
                      
                      Earnings
                        (Numerator)
                      
                      
                      Shares
                        (Denominator)
                      
                      
                      Per
                        share
                        amountNet
      loss
                      
                      $
                      (990,410
                      )
                      
                      
                      
                      
                      
                      
                      
                      $
                      (1,192,739
                      )Basic
      loss per share:Net
      loss available to common shareholders
                      
                      $
                      (990,410
                      )
                      
                      
                      12,647,051
                      
                      
                      $
                      (.08
                      )
                      
                      $
                      (1,192,739
                      )
                      
                      
                      12,647,051
                      
                      
                      $
                      (.09
                      )Effect
      of dilutive potential common shares:Stock
      options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -Diluted
      loss per share:Net
      loss available to common shareholders
                      
                      $
                      (990,410
                      )
                      
                      
                      12,647,051
                      
                      
                      $
                      (.08
                      )
                      
                      $
                      (1,192,739
                      )
                      
                      
                      12,647,051
                      
                      
                      $
                      (.09
                      )




Stock
options which were excluded from the diluted net (loss) earnings per share
calculation due to their antidilutive effect are as follows:





Three months endedNovember 27,
                          2009
                        
                        
                        November 28,
                          2008Common
      stock options:Number
      of shares
                        
                        731,375
                        
                        
                        918,531Range
      of exercise prices
                        
                        $.63 to $2.50
                        
                        
                        $.63 to $2.72





Note
11 Segment Information and Concentrations (Unaudited)


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




14





In this
single operating segment we have three sources of revenues as
follows:





Three months endedNovember 27,
                                2009
                              
                              
                              November 28,
                                2008Product
      LineDirect
      Broadcast Satellite
                              
                              $
                              1,796,509
                              
                              
                              $
                              2,118,780Telecom
      and Custom Products
                              
                              
                              -
                              
                              
                              
                              9,461Service
                              
                              
                              121,276
                              
                              
                              
                              194,537Revenues,
      net
                              
                              $
                              1,917,785
                              
                              
                              $
                              2,322,778





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





Three months endedNovember 27,
                                2009
                              
                              
                              November 28,
                                2008ProductAudio
      broadcast receivers
                              
                              
                              22.4
                              %
                              
                              
                              23.2
                              %Network
      control products
                              
                              
                              14.5
                              %
                              
                              
                              14.6
                              %Professional
      and broadcast receivers
                              
                              
                              29.1
                              %
                              
                              
                              11.8
                              %




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 endedNovember 27,
                                        
                                        
                                        November 28,2009
                                        
                                        
                                        2008Geographic
      AreaUnited
      States
                                        
                                        $
                                        1,715,056
                                        
                                        
                                        $
                                        2,217,800Latin
      America
                                        
                                        
                                        25,757
                                        
                                        
                                        
                                        93,109Canada
                                        
                                        
                                        1,610
                                        
                                        
                                        
                                        9,882Europe
                                        
                                        
                                        99,567
                                        
                                        
                                        
                                        1,654Other
                                        
                                        
                                        75,795
                                        
                                        
                                        
                                        333Revenues,
      net
                                        
                                        $
                                        1,917,785
                                        
                                        
                                        $
                                        2,322,778





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





Three
      months endedNovember 27,
                                    
                                    November 28,2009
                                    
                                    2008Customer
      1
                                    
                                    23.0%
                                    
                                    23.1%Customer
      2
                                    
                                    10.2%
                                    
                                    13.5%Customer
      3
                                    
                                    10.1%
                                    
                                    (a)Customer
      4
                                    
                                    (a)
                                    
                                    17.0%





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




15




Note
12 Commitments


We have
one manufacturing and purchasing agreement for certain finished goods
inventories. At November 27, 2009, outstanding purchase commitments under these
agreements amounted to $768,000.





Note
13 Guarantees and Indemnifications


Letters
of Credit


We
provide standby letters of credit in the ordinary course of business to certain
suppliers pursuant to manufacturing and purchasing agreements.  At
November 27, 2009, 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 November 27, 2009,
$3,691,000 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).


16


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 quarter 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 Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI is 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.




17




Revenues
for the first quarter of fiscal 2010 decreased $405,000, or 17.4%, to $1,918,000
from $2,323,000 for the same period in fiscal 2009. The operating results for
the three month period ended November 27, 2009, were a net loss of $(990,000) or
$(0.08) per share, compared to a net loss of $(1,193,000) or $(0.09) per share,
for the three month period ended November 28, 2008.





Financial
Position and Liquidity





At
November 27, 2009, 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 three months of fiscal 2010, our line of credit and unsecured promissory
note net outstanding borrowings increased $1,142,000 to $3,941,000 at November
27, 2009, from $2,799,000 at August 28, 2009.  At December 29, 2009,
the outstanding balance on the line of credit was at the maximum limit of
$4,000,000 and our cash balances primarily funded from loan advances were
approximately $374,000, net of outstanding checks of approximately
$312,000.





During
the first quarter of fiscal 2010 bookings were approximately $1.8 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 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.  (See Note 1 to the Consolidated
Financial Statements).





Operating
activitiesused
$845,000 of cash and investing activities used $214,000 of cash, which consisted
of capitalized software additions of $212,000 and equipment additions of
$2,000.  (See the Liquidity and Capital Resources section for further
discussion.)





Current
Developments





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.)


18





RESULTS
OF OPERATIONS


THREE
MONTHS ENDED NOVEMBER 27, 2009 COMPARED TO THREE MONTHS ENDED NOVEMBER 28,
2008





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





Three months ended (unaudited)November 27,
                      2009
                    
                    
                    November 28,
                      2008Revenue
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      of products sold
                    
                    
                    77.9
                    
                    
                    
                    73.1Gross
      margin
                    
                    
                    22.1
                    
                    
                    
                    26.9Selling,
      general, and administrative
                    
                    
                    50.1
                    
                    
                    
                    50.4Research
      & development
                    
                    
                    19.5
                    
                    
                    
                    26.2Operating
      loss
                    
                    
                    (47.5
                    )
                    
                    
                    (49.7
                    )Interest
      expense
                    
                    
                    ( 4.1
                    )
                    
                    
                    ( 1.7
                    )Net
      loss
                    
                    
                    (51.6
                    )%
                    
                    
                    (51.4
                    )%





The
operating results for the three month period ended November 27, 2009, were a net
loss of $(990,000) or $(0.08) per share, compared to a net loss of $(1,193,000)
or $(0.09) per share for the three month period ended November 28,
2008.





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 quarter of fiscal 2010, we made further
reductions in headcount to bring the current number of employees to
51.  The operating results for the first quarter of fiscal 2010
included severance costs of approximately $247,000 compared to $24,000 in the
same period of fiscal 2009.





Revenues
- Revenues for the first quarter of fiscal 2010 decreased $405,000, or 17.4%, to
$1,918,000 from $2,323,000 for the same period in fiscal 2009.





Direct
Broadcast Satellite (DBS) revenues (including service revenues) decreased
$395,000, or 17.1%, in the first quarter of fiscal 2010 to $1,918,000 from
$2,313,000 for the same period in fiscal 2009.  First quarter revenues
were adversely affected by lower than expected shippable bookings as discussed
above.  First quarter revenues included continued shipments of
Encompass LE2, our next generation business music audio receiver, to business
music provider, Muzak LLC., Unity® 4600 and
Unity® 4650
receivers to Roberts Communications Network for network upgrades and shipments
to MegaHertz for distribution of our products to the U.S. cable
market.





Revenues
and order backlog 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 November 27, 2009,
three customers accounted for 23.0%, 10.2% and 10.1% of revenues,
respectively. For the three months ended November 28, 2008, three customers
accounted for 23.1%, 17.0% and 13.5% 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.  WCI’s backlog scheduled to ship
within eighteen months was approximately $4.2 million at November 27, 2009,
compared to $4.3 million at August 28, 2009, and $8.1 million at November 28,
2008.  Three customers accounted for approximately 61.9%, 11.1% and
9.1%, respectively, of the backlog at November 27, 2009.  The total
multi-year backlog at November 27, 2009 was approximately $6.6 million, compared
to $6.8 million at August 28, 2009 and $12.5 million at November 28,
2008.  Approximately $3.1 million of the November 27, 2009 backlog is
scheduled to ship during fiscal 2010.





Gross
Profit Margins – The Company’s gross profit margin percentages were 22.1%
for the three month period endedNovember 27, 2009,
compared to 26.9% for the three month period ended November 28, 2008. Gross
profit margin dollars decreased $201,000 for the three month period ended
November 27, 2009 compared to the same period ended November 28,
2008.  The decreases in margin percentages and dollars were mainly due
to the decrease in revenues.


19





Selling,
General and Administrative - Selling, general and administrative
(SG&A) expenses decreased $208,000, or 17.8%, to $962,000 in the first
quarter of fiscal 2010 from $1,170,000 in the first quarter of fiscal
2009.  Corporate SG&A expenses in the first quarter of fiscal 2010
decreased $112,000, or 44.1%, to $142,000 from $254,000 in same period of fiscal
2009, mainly due to a decrease in professional fees.  WCI’s SG&A
expenses decreased $96,000, or 10.5%, to $820,000 in the first quarter of fiscal
2010 from $916,000 in the same period of fiscal 2009. WCI’s SG&A expenses in
the first quarter 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 $172,000
primarily due to a 10% reduction in Company-wide paid working hours beginning in
January 2009 and reductions in headcount, (ii) sales and marketing expenses of
$51,000, (iii) general overhead costs of $38,000 due to elimination of 401k
company matching expense and overall cost reduction efforts of overhead
expenses, and (iv) reduction in professional fees of $8,000. Bad debt expense
was $15,000 in the first quarter of fiscal 2010 compared to none in the same
period of fiscal 2009.  As a percentage of revenues, SG&A expenses
were 50.1% for the three month period ended November 27, 2009, compared to 50.4%
for the same period ended November 28, 2008.





Research
and Development - Research and development expenditures, including
capitalized software development costs, were $586,000 or 30.6% of revenues in
the first quarter of fiscal 2010, compared to $863,000 or 37.1% of revenues for
the same period of fiscal 2009.  The decrease in expenditures in the
first quarter of fiscal 2010 compared to the same period of fiscal 2009 was
mainly due to lower salaries, as a result of reduced head count and the 10%
reduction in Company-wide paid working hours beginning in January
2009.  Capitalized software development costs amounted to $212,000 in
the first quarter of fiscal 2010 compared to $254,000 in the first quarter of
fiscal 2009. The decrease in capitalized software costs was related to completed
projects and reductions in headcount.  Research and development
expenses, excluding capitalized software development costs, were $374,000 or
19.5% of revenues in the first quarter of fiscal 2010 compared to $609,000 or
26.2% of revenues in the same period of fiscal 2009. 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 $39,000 to $78,000 in the first quarter of fiscal
2010 from $39,000 in the same period in fiscal 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 Expense - For the three months ended November 27, 2009, no income tax
benefit was recorded due to an increase in the deferred tax asset valuation
allowance.  The valuation allowance increased $357,000 in the first
quarter of fiscal 2010.  At November 27, 2009, net deferred tax assets
of $6,974,000 were fully reserved by a valuation allowance.  At
November 27, 2009, we had a federal net operating loss carryforward of
approximately $12,788,000, which expires beginning fiscal 2021 through fiscal
2030.  Additionally, we had an alternative minimum tax credit of
$134,000 which was fully offset by the valuation allowance.





LIQUIDITY
AND CAPITAL RESOURCES


THREE
MONTHS ENDED NOVEMBER 27, 2009





We have
experienced recurring net losses from operations, which have caused an
accumulated deficit of approximately $18,942,000 at November 27,
2009.  We had a working capital deficit of approximately $2,024,000 at
November 27, 2009 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 quarter of fiscal 2010 were financed by our
loan facility and an unsecured promissory note. Our combined net borrowings
increased $1,142,000 to $3,941,000 at November 27, 2009 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
December 29, 2009, 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 $374,000, net of outstanding checks of approximately
$312,000.




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 quarter of fiscal 2010, we made further
reductions in headcount to bring the current number of employees to 51. 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.


20


During
the first quarter of fiscal 2010 bookings were approximately $1.8 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 $4.2 million
at November 27, 2009, compared to $4.3 million at August 28, 2009, and $8.1
million at November 28, 2008.  The total multi-year backlog at
November 27, 2009 was approximately $6.6 million, compared to $6.8 million at
August 28, 2009 and $12.5 million at November 28, 2008.Approximately
$3.1 million of the November 27, 2009 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.





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).


21





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.





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 November
27, 2009, balances outstanding on the revolving line of credit amounted to
$3,691,000.  At December 29, 2009, 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 $374,000, net of
outstanding checks of approximately $312,000.





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.


22





Cash
Flows





During
the first quarter of fiscal 2010, operating activities used $845,000 of
cash.  Net loss adjusted for expense provisions and depreciation and
amortization (before working capital changes) used cash of $640,000, while
changes in accounts receivable, deferred revenue and customer deposit balances
used $13,000 of cash.  Changes in accounts payable and accrued
expenses used $559,000 of cash, while changes in inventories and other assets
provided $367,000 of cash.  Cash used by investing activities was
$214,000, which consisted of capitalized software additions of $212,000 and
equipment additions of $2,000. Financing activities provided $1,142,000 of cash
from net line of credit and unsecured promissory note borrowings.




Contractual
Obligations





We have
one manufacturing and purchasing agreement for certain finished goods
inventories. AtNovember 27, 2009,
outstanding purchase commitments under these agreements amounted to
$768,000.





The
Company’s long-term contractual obligations as of November 27, 2009 consisted
of:





Payments Due by PeriodContractual Obligations
                    
                    Total
                    
                    
                    Fiscal
                      2010
                    
                    
                    Fiscal
                      2011-2012
                    
                    
                    Fiscal
                      2013-2014Operating
      leases
                    
                    $
                    323,000
                    
                    
                    $
                    79,000
                    
                    
                    $
                    244,000
                    
                    
                    $
                    -Line
      of credit and note payable
                    
                    
                    3,941,000
                    
                    
                    
                    3,941,000
                    
                    
                    
                    -
                    
                    
                    
                    -Purchase
      commitments
                    
                    
                    768,000
                    
                    
                    
                    768,000
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    5,032,000
                    
                    
                    $
                    4,788,000
                    
                    
                    $
                    244,000
                    
                    
                    $
                    -





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 November 27, 2009, deferred extended service
maintenance revenues were $462,000, and deferred revenues related to future
performance obligations were $79,000 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 to be
held for future delivery as scheduled and designated by the buyer, and no
additional performance obligations by the Company exist.  For these
transactions, the finished goods are segregated from inventory and normal
billing and credit terms are granted.  For the three months ended
November 27, 2009, 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.


23





Our
principal sources of revenues are from the sales of various satellite
communications equipment.  Embedded in our products is internally
developed software of varying applications.  Historically, we have not
sold or marketed our software separately or otherwise licensed our software
apart from the related communications equipment.  Should we begin to
market or sell software whereby it is more than an incidental component of the
hardware, then we would recognize software license revenue 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, 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.  AtNovember 27, 2009,
inventories, net of reserve provisions, amounted to $4,118,000.





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.  AtNovember 27, 2009,
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 November 27, 2009, deferred tax assets in the
amount of $6,974,000 were fully reserved by a valuation allowance. For the three
months ended November 27, 2009, the valuation allowance was increased by
$357,000.





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 November 27, 2009,
accounts receivable, net of allowances for doubtful accounts, amounted to
$1,571,000.





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 quarter 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 (November 27, 2009).  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.


24




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 December 29, 2009 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 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.”





The
Nasdaq Stock Market may delist our securities, which could limit investors’
ability to trade in our securities.





On
December 9, 2009, we received a letter (the “December 9th
Letter”) from The Nasdaq Stock Market (“Nasdaq”) indicating that the Company’s
securities will be delisted from Nasdaq at the opening of business on December
16, 2009 and a Form 25-NSE will be filed with the Securities and Exchange
Commission (the “Commission”) which will 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 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 (the “Wegener Appeal”) with the
Nasdaq Hearing Panel.





As
previously reported in a Form 8-K as filed with the Commission on August 22,
2008, the Company previously received a notice from Nasdaq indicating that for
the last 30 consecutive business days, the bid price of the Company’s common
stock had closed below the minimum $1.00 per share requirement for continued
inclusion under Marketplace Rule 4310(c)(4) (the “Marketplace
Rule”).  The notice also stated that the Company had been provided
with 180 calendar days, or until February 17, 2009, to regain compliance in
accordance with Marketplace Rule 4310(c)(8)(D).  On October 16, 2008,
Nasdaq announced it had temporarily suspended enforcement of the minimum bid
price and minimum market value of publicly held shares through January 16, 2009.
A subsequent suspension announced by Nasdaq extended the enforcement date
through July 31, 2009, which gave the Company until December 7, 2009, to regain
compliance with the Marketplace Rule.  Because the Company was not in
compliance with the Marketplace Rule or The Nasdaq Capital Market initial
listing criteria on December 7, 2009, the Nasdaq staff sent the December 9th
Letter.





Also as
previously reported in a Form 8-K as filed with the Commission on December 3,
2009, on November 30, 2009, the Company received a notice (the “Notice”) from
Nasdaq indicating that the Company’s shareholders’ equity as of August 28, 2009,
did not meet the minimum requirement of $2,500,000 for continued listing as set
forth in Continued Listing Standards for Primary Equity Securities Rule 5550(b)
(the “Equity Rule”). In addition, the Notice stated that, as of November 27,
2009, the Company did not meet the Equity Rule’s 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.





The
Company intends to address the issues relating to the Equity Rule as part of the
Wegener Appeal relating to the Marketplace Rule.  In particular, the
Company currently intends to exercise its right, as provided under Nasdaq
procedures, to present a plan to regain compliance with the Equity Rule,
including a time line for compliance, at a hearing before the Nasdaq Hearing
Panel.


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No
assurances can be given that the Wegener Appeal and submission of a plan for
compliance, if made and presented, will be successful.  The Company’s
securities will continue to be listed on Nasdaq during this appeal
process.





If our
common stock is delisted by Nasdaq, the trading market for our common stock
would likely be adversely affected, 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.





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
below.  For each such asterisked exhibit there is shown below the
description of the previous 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)31.1
                  
                  
                  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


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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:  January
      11, 2010
                          By:
                          /s/ C. Troy Woodbury,
Jr.C.
      Troy Woodbury, Jr.President
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      January 11, 2010
                          By:
                          /s/ James TraicoffJames
      TraicoffTreasurer
      and ChiefFinancial
      Officer(Principal
      Financial and Accounting
Officer)


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