##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from     to     .
 Commission File Number 000-27843
 
 Somera Communications, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    77-0521878(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 301 S. Northpoint Drive, Coppell, TX 75019
(Address of principal executive offices and zip code)
 Registrants telephone number, including area code: (972) 304-5660
 
 Securities registered pursuant to Section 12(b) of the Act: None
 Securities registered pursuant to Section 12(g) of the Act:
 Common Stock, $0.001 par value per share
(Title of Class)
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



SOMERA COMMUNICATIONS, INC.
 INDEX
 PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    5Item 1B.
    
    Unresolved Staff Comments
    
    
    9Item 2.
    
    Properties
    
    
    9Item 3.
    
    Legal Proceedings
    
    
    9Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    9PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    10Item 6.
    
    Selected Financial Data
    
    
    11Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 7A.
    
    Qualitative and Quantitative Disclosure About Market Risk
    
    
    24Item 8.
    
    Financial Statements
    
    
    25Item 9.
    
    Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    50Item 9A.
    
    Controls and Procedures
    
    
    50Item 9B.
    
    Other Information
    
    
    50PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    51Item 11.
    
    Executive Compensation
    
    
    53Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    60Item 13.
    
    Certain Relationships and Related Transactions
    
    
    61Item 14.
    
    Principal Accountant Fees and Services
    
    
    62PART IVItem 15.
    
    Exhibits and Financial Statement Schedule
    
    
    63SubsidiariesConsent of PricewaterhouseCoopers LLPCertification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906




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PART I
   
 ITEM 1. BUSINESS
  The Business
  Industry Background and Trends
  
    
    A convergence of new technology that is expected to accelerate the displacement and transition of network equipment
from VoIP (voice over internet protocol) and its impact on circuit switching, edge, and access devices, to GigE
(Gigabit Ethernet) and its displacement of transport technologies such as SONET/SDH, to the continued broadband
evolution of last mile technologies such as DSL, FTTP (fiber to the premises), and subsequent migration from 2G to 3G
wireless technologies;
    
    The acceleration of mergers and acquisitions in the
telecommunications industry that will drive network
redundancies and excess equipment inventories, and
increase pressure to identify savings synergies;
    
    The competitive pressures to offer new services and
thereby lower the costs of legacy networks and preserve
capital for investments in these new revenue producing
services; and
    
    The need to create consistent and stable processes to manage equipment assets, accelerated by the requirements of Sarbanes-Oxley Act compliance.
  The Somera Strategy
  
 1. Equipment Brokerage
   1




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2. Somera RecoveryPLUS 
 
  3. Somera RepairPLUS
   4. Somera LifecyclePLUS
   
    
    Logistics Management:We provide complete outsource
logistics support for inventory management including
barcoding, warehousing, tracking and reporting, and
shipment based on the customers defined schedule.
    
    Custom Configurations:We provide custom
configurations to help operators deploy new technologies
or redeploy existing equipment assets. Our services
include unique engineered solutions to customer-defined
configurations, rack-n-stack and kitting and staging,
testing and verification to specifications, and ancillary
equipment procurement.
    
    Installation/De-Installation:Oftentimes
under-utilized equipment assets need to be de-installed
and then installed as part of the redeployment process.
We provide project management, field supervision,
certified technicians, and required logistics and
materials management support to complement this offering.
    
    Spares Management:Maintaining access to
readily available spare parts is critical to
reducing network downtime. Our services
support carriers needs to have a reliable,
available source for network spares. Spares
can either be inventoried on behalf of the
carrier or procured on the market based on
demand and usage by the customer.
    
    End-of-Life Management:Somera works with carriers and
OEMs to help them plan for the ultimate end-of-life of
mature technologies in the network. We support this
process with asset acquisition, spares maintenance,
repair, and asset consolidation and planning at minimum
required stocking levels.
 
  2




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
 
    
    Operational Excellence:We have established a 259,000
square foot Execution and Deployment Center in Coppell,
Texas which enables us to support and integrate over 400
different types of manufacturer technologies in addition
to testing, repair, and refurbishment of equipment to
meet high quality and uptime standards. Our operations
support both high volume and transactional parts
fulfillment to the delivery of custom-engineered
solutions. We have achieved certification to ISO
9001:2000 and TL9000 standards for this facility. In
addition, in 2005, we consolidated our facilities in
Amsterdam, The Netherlands into a new 79,000 square foot
location.
    
    Program Leadership:Our intellectual capital in
proprietary technology information systems and market
knowledge of equipment demand, values and customer
networks enables us to develop leading programs to
improve return on capital. We have built a proprietary
global database of customers, networks, and equipment
comprised of over 14,000 different items from over 400
different manufacturers, spanning a decade of customers
strategic and transactional requirements. This provides
unique capabilities to locate equipment customers need at
reasonable prices, while helping us to determine the
market value and financial return on equipment. Our
operations in Europe further enhance our knowledge and
expertise of technologies based on different standards
and manufacturer offerings available outside of North
America. We believe we can negotiate deals that give us
access to the right equipment, at the right time, at the
right price.
    
    Customer Service:Our strategy is built on an integrated model that combines sales, logistics, and support to connect with
our customers to accelerate sales and build brand and customer loyalty. Our strategy to execute this important goal includes
building our e-presence with Somera Online, a web based inventory search tool, creating a more effective customer service and
support program, as well as offering to support the immense technology transition that is occurring in the network. With
purchasing decisions being made or influenced by many levels and departments within an operators network,
our teams are trained to address the various technical and financial requirements to gain a greater share of capital expenditures.
  Customers
   Competition
    
    
    ability to devote greater resources to the development, promotion, and sale of their equipment and related services;
    
    ability to adopt more aggressive pricing policies;
    
    ability to expand existing customer relationships and
more effectively develop new customer relationships,
including securing long term purchase agreements due to
time evolved relationships;
    
    ability to leverage their customer relationships
through volume purchasing contracts and other means
intended to discourage customers from purchasing products
from us due to agreements with OEMs;
    
    ability to more rapidly adopt new or emerging
technologies and increase the array of products offered
to better respond to changes in customer requirements;
    
    greater focus and expertise on specific manufacturers or product lines; and
    
    ability to form new alliances or business combinations to rapidly acquire significant market share.
  Employees
  3




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Listing Criteria for The NASDAQ National Market
    Where You Can Find More Information
 http://www.sec.gov
 EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionDavid W. Heard
    
    
    37
    
    
    President and Chief Executive OfficerKent Coker
    
    
    53
    
    
    Chief Financial Officer and Corporate SecretaryMichael Foliano
    
    
    45
    
    
    Senior Vice President, Sales, Services, Supply and Operations
    4




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##### Table of Contents



ITEM 1A. RISK FACTORS
 Certain Factors That May Affect Future Operating Results
  Going
Concern and Future Capital Requirements
       
    
    Take advantage of business opportunities, including, but not limited to, more international expansion or acquisitions of complementary businesses;
    
    Develop and maintain higher inventory levels;
    
    Gain access to new product lines;
    
    Develop new services;
    
    Respond to competitive pressures; or
    
    Fund general operations.
  Our operating results are likely to fluctuate in future periods, which might lead to reduced prices
for our stock.
  
    
    the rate, timing and volume of orders for the telecommunications infrastructure equipment and services we sell;
    
    the rate at which telecommunications operators de-install their equipment;
    
    decreases in our selling prices due to competition in the secondary market, price pressure from OEMs or other competitors;
    
    our ability to obtain products cost-effectively from OEMs, distributors, operators and other secondary sources of telecommunications equipment;
    
    our ability to provide equipment and service offerings on a timely basis to satisfy customer demand;
    
    variations in customer capital spending patterns due to seasonality, economic conditions for telecommunications operators and other factors;
    
    write-offs due to inventory defects or obsolescence;
    
    the sales cycle for services we sell, which can be relatively lengthy, especially as it relates to our lifecycle management services offering;
    
    delays in the commencement of our operations in new market segments and geographic regions;
    
    costs relating to possible acquisitions and
integration of new businesses, including, but not limited
to, costs associated with acquisitions that we elect not
to pursue;
    
    delays or concerns resulting from or related to completed and/or impending consolidation of telecommunications operators;
    
    the ability to retain top brokers;
 5




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
    
    the speed of adoption of RecoveryPLUS in our customers organizations; and
    
    impacts of rebalancing our operations and the ability to match supply with demand.
 Our business depends upon our ability to match third party re-used equipment supply with
telecommunications operators demand for this equipment.
  Our ability to meet customer demand and the growth of our net revenue could be harmed if we are
unable to manage our inventory and other assets needs accurately.
  We do not have many formal relationships with suppliers of telecommunications equipment and may not
have access to adequate product supply.
  Defects in the equipment we sell or failure to perform services at a high level of performance may
seriously harm our credibility and our business.
  Our strategy to outsource services could impair our ability to deliver our equipment on a timely
basis.
  The market for supplying equipment and services to telecommunications operators is highly
competitive.
   We may be forced to reduce the sales prices for the equipment and services we sell.
  6




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Our customer base is concentrated and the loss of one or more of our key customers would have a
negative impact on our net revenue.
  If we do not maintain our international operations our business could suffer.
  Our quarterly net revenue and the price of our stock may be negatively impacted by the seasonal
purchasing patterns of our customers.
  Our business may suffer if we are not successful in our efforts to keep up with a rapidly changing
market.
  
    
    respond to emerging industry standards and other technological changes;
    
    develop our internal technical capabilities and expertise;
    
    broaden our equipment and service offerings; and
    
    adapt our services to new technologies as they emerge.
  A downturn and/or consolidation in the telecommunications industry or an industry trend toward
reducing or delaying additional equipment purchases due to cost-cutting and other pressures could
reduce demand for our products.
  The lifecycles of telecommunications infrastructure equipment may become shorter, which would
decrease the supply of, and carrier demand for, re-used equipment, and telecommunications equipment
lifecycle services, which could increase our expenses.
  The market for telecommunications equipment lifecycle services is relatively new and it is unclear
whether our service offerings will achieve long-term market acceptance.
  Many of our customers are telecommunications operators that may at any time reduce or discontinue
their purchases of the equipment and services we sell to them.
  We may fail to continue to attract, develop and retain key management and sales personnel, which
could negatively impact our business.
  7




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If we engage in acquisitions, we may experience difficulty assimilating the operations or personnel
of the acquired companies, which could threaten our future growth.
  New regulations related to equity compensation could adversely affect our operating results and
affect our ability to attract and retain key personnel.
  Failure to comply with all of the requirements imposed by Section 404 of the Sarbanes-Oxley Act of
2002 could result in a negative market reaction.
    We are potentially subject, to new environmental legislation enacted by the European Union and, if
we do not comply, our operating profit could be adversely impacted.
  We may not be able to continue to meet the listing criteria for The Nasdaq National Market,
which would adversely affect the ability of investors to trade our common stock and could adversely
affect our business and financial condition.
    8




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Our facilities could be vulnerable to damage from earthquakes and other natural disasters.
  The corruption or interruption of key software systems we use could cause our business to suffer if
it delays or restricts our ability to meet our customers needs.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
     
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  9




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
   High
    
    LowYear Ended December 31, 2005First quarter
    
    $
    1.59
    
    
    $
    1.25Second quarter
    
    $
    1.62
    
    
    $
    1.35Third quarter
    
    $
    1.61
    
    
    $
    0.92Fourth quarter
    
    $
    0.98
    
    
    $
    0.72Year Ended December 31, 2004First quarter
    
    $
    3.14
    
    
    $
    1.45Second quarter
    
    $
    2.13
    
    
    $
    1.30Third quarter
    
    $
    1.69
    
    
    $
    1.28Fourth quarter
    
    $
    1.41
    
    
    $
    1.06
    10




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ITEM 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands except per share data)Statements of Operations:Revenues:Equipment Revenue
    
    $
    66,622
    
    
    $
    87,120
    
    
    $
    119,729
    
    
    $
    181,616
    
    
    $
    214,099Service and program Revenue
    
    
    10,506
    
    
    
    12,914
    
    
    
    16,838
    
    
    
    17,584
    
    
    
    7,157Total Revenues
    
    
    77,128
    
    
    
    100,034
    
    
    
    136,567
    
    
    
    199,200
    
    
    
    221,256Cost of Revenues:Equipment cost of revenue
    
    
    45,066
    
    
    
    67,008
    
    
    
    88,458
    
    
    
    134,726
    
    
    
    143,021Service and program cost of revenue
    
    
    5,803
    
    
    
    9,479
    
    
    
    13,298
    
    
    
    10,864
    
    
    
    5,457Total cost of revenues
    
    
    50,869
    
    
    
    76,487
    
    
    
    101,756
    
    
    
    145,590
    
    
    
    148,478Gross profit
    
    
    26,259
    
    
    
    23,547
    
    
    
    34,811
    
    
    
    53,610
    
    
    
    72,778Operating expenses:Sales and marketing
    
    
    25,103
    
    
    
    22,258
    
    
    
    26,812
    
    
    
    31,289
    
    
    
    24,902General and administrative
    
    
    17,801
    
    
    
    24,435
    
    
    
    28,349
    
    
    
    26,979
    
    
    
    22,049Other operating expense
    
    
    1,256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill impairment (1)
    
    
    1,760
    
    
    
    
    
    
    
    24,825
    
    
    
    
    
    
    
    Asset impairment (2)
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    1,593
    
    
    
    Amortization of intangible assets (3)
    
    
    50
    
    
    
    67
    
    
    
    751
    
    
    
    689
    
    
    
    1,484Restructuring charges (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,759
    
    
    
    352Total operating expenses
    
    
    45,970
    
    
    
    46,760
    
    
    
    81,259
    
    
    
    63,309
    
    
    
    48,787Income (loss) from operations
    
    
    (19,711
    )
    
    
    (23,213
    )
    
    
    (46,448
    )
    
    
    (9,699
    )
    
    
    23,991Other income (expense), net
    
    
    (10
    )
    
    
    643
    
    
    
    604
    
    
    
    1,037
    
    
    
    1,724Income (loss) before income taxes
    
    
    (19,721
    )
    
    
    (22,570
    )
    
    
    (45,844
    )
    
    
    (8,662
    )
    
    
    25,715Income tax provision (benefit)
    
    
    135
    
    
    
    58
    
    
    
    12,666
    
    
    
    (3,508
    )
    
    
    10,929Net income (loss)
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )
    
    $
    (5,154
    )
    
    $
    14,786Net income (loss) per share basic (5)
    
    $
    (0.40
    )
    
    $
    (0.45
    )
    
    $
    (1.19
    )
    
    $
    (0.11
    )
    
    $
    0.31Weighted average shares basic
    
    
    50,223
    
    
    
    49,739
    
    
    
    49,126
    
    
    
    48,645
    
    
    
    48,260Net income (loss) per share diluted (5)
    
    $
    (0.40
    )
    
    $
    (0.45
    )
    
    $
    (1.19
    )
    
    $
    (0.11
    )
    
    $
    0.30Weighted average shares diluted
    
    
    50,223
    
    
    
    49,739
    
    
    
    49,126
    
    
    
    48,645
    
    
    
    48,625
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December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Balance Sheet Data:Working capital
    
    $
    21,158
    
    
    $
    41,770
    
    
    $
    62,334
    
    
    $
    77,332
    
    
    $
    90,476Cash and cash equivalents
    
    
    6,508
    
    
    
    7,654
    
    
    
    30,642
    
    
    
    38,231
    
    
    
    54,522Short-term investments
    
    
    11,200
    
    
    
    32,757
    
    
    
    16,200
    
    
    
    12,200
    
    
    
    Total assets
    
    
    58,188
    
    
    
    75,089
    
    
    
    98,842
    
    
    
    165,090
    
    
    
    178,076Total liabilities (6)
    
    
    28,797
    
    
    
    26,761
    
    
    
    28,705
    
    
    
    36,990
    
    
    
    46,060Stockholders equity
    
    
    29,391
    
    
    
    48,328
    
    
    
    70,137
    
    
    
    128,100
    
    
    
    132,016
 
 (1)
    
    See Note 5 to the Consolidated Financial Statements.(2)
    
    See Note 3 and Note 11 to the Consolidated Financial Statements.(3)
    
    The acquisition of MSI Communications, Inc. in October 2000 and Asurent Technologies in October 2001 includes amortization totaling
$302,000 in 2000 and $1.4 million in 2001 related to goodwill and acquired workforce. Pursuant to SFAS No. 142 Goodwill and Other
Intangible Assets guidelines, for years subsequent to December 31, 2001, the carrying values must be assessed for impairment and no
amortization is recorded. See Note 5 to the Consolidated Financial Statements.(4)
    
    See Note 11 to the Consolidated Financial Statements.(5)
    
    See Note 2 to the Consolidated Financial Statements for an explanation of the calculation of net income (loss) per sharebasic and diluted.(6)
    
    We had no long- term debt as of December 31, 2005, 2004, 2003, 2002, and 2001.  12




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Company Overview
        Corporate History
  Business Combinations
      13




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Management Summary
      Results of Operations
 2005 compared to 2004
 Equipment Revenue
    Service and Program Revenue.
 Equipment
Cost of Revenue
 Service
Cost of Revenue
 Equipment
Gross Profit.
 Service
and Program Gross Profit.
 Sales and Marketing.
 14




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General and Administrative.
 Impairment of Goodwill.
  Other Operating Expense.
 Amortization of Intangibles
 Other Income (Expense), net.
 Income Tax Provision.
 2004 Compared to 2003
 Equipment Revenue.
   Service Revenue.
 Equipment Cost of Revenue.
 15




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Service Cost of Revenue.
 Equipment Gross Profit.
 Service Gross Profit.
 Sales and Marketing
 General and Administrative
 Restructuring Charges and Asset Impairment
    Amortization of Intangible Assets
 16




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Other Income, Net.
 Income Tax Provision (Benefit)
 Liquidity and Capital Resources
  Operating Activities
    Investing Activities
    Financing Activities
  Going
Concern and Future Capital Requirements
   17




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
    
    Take advantage of business opportunities, including, but not limited to, more international expansion or acquisitions of complementary businesses;
    
    Develop and maintain higher inventory levels;
    
    Gain access to new product lines;
    
    Develop new services;
    
    Respond to competitive pressures; or
    
    Fund general operations.
  Listing Criteria for the Nasdaq National Market
     2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterGross restructuring related leases (see note 11)
    
    $
    22
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Leases
    
    
    1,989
    
    
    
    1,945
    
    
    
    1,973
    
    
    
    1,907
    
    
    
    1,120
    
    
    
    1,739Total commitments
    
    $
    2,011
    
    
    $
    1,945
    
    
    $
    1,973
    
    
    
    1,907
    
    
    
    1,120
    
    
    $
    1,739
  18




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Off-Balance Sheet Arrangements
  Commitments
  Contingencies
  19




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Results of Operations
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(dollar amounts in thousands)Statements of Operations Data:Revenues:Equipment revenue
    
    $
    66,622
    
    
    $
    87,120
    
    
    $
    119,729Service and program revenue
    
    
    10,506
    
    
    
    12,914
    
    
    
    16,838Total revenues
    
    
    77,128
    
    
    
    100,034
    
    
    
    136,567Cost of revenues:Equipment cost of revenue
    
    
    45,066
    
    
    
    67,008
    
    
    
    88,458Service and program cost of revenue
    
    
    5,803
    
    
    
    9,479
    
    
    
    13,298Total cost of revenues
    
    
    50,869
    
    
    
    76,487
    
    
    
    101,756Gross Profit
    
    
    26,259
    
    
    
    23,547
    
    
    
    34,811Operating expenses:Sales and marketing
    
    
    25,103
    
    
    
    22,258
    
    
    
    26,812General and administrative
    
    
    17,801
    
    
    
    24,435
    
    
    
    28,349Other operating expense
    
    
    1,256
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    1,760
    
    
    
    
    
    
    
    24,825Asset impairment
    
    
    
    
    
    
    
    
    
    
    522Amortization of intangible assets
    
    
    50
    
    
    
    67
    
    
    
    751Total operating expenses
    
    
    45,970
    
    
    
    46,760
    
    
    
    81,259Loss from operations
    
    
    (19,711
    )
    
    
    (23,213
    )
    
    
    (46,448
    )Other income (expense), net
    
    
    (10
    )
    
    
    643
    
    
    
    604Loss before income taxes
    
    
    (19,721
    )
    
    
    (22,570
    )
    
    
    (45,844
    )Income tax provision
    
    
    135
    
    
    
    58
    
    
    
    12,666Net loss
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )As a Percentage of Net Revenue:Revenues:Equipment revenue
    
    
    86.4
    
    
    
    87.1
    
    
    
    87.7Service and program revenue
    
    
    13.6
    
    
    
    12.9
    
    
    
    12.3Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues:Equipment cost of revenue
    
    
    58.4
    
    
    
    67.0
    
    
    
    64.8Service and program cost of revenue
    
    
    7.5
    
    
    
    9.5
    
    
    
    9.7Total cost of revenues
    
    
    66.0
    
    
    
    76.5
    
    
    
    74.5Gross Profit
    
    
    34.0
    
    
    
    23.5
    
    
    
    25.5Operating expenses:Sales and marketing
    
    
    32.5
    
    
    
    22.3
    
    
    
    19.6General and administrative
    
    
    23.1
    
    
    
    24.4
    
    
    
    20.8Other operating expense
    
    
    1.6
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    2.3
    
    
    
    
    
    
    
    18.2Asset impairment
    
    
    
    
    
    
    
    
    
    
    0.4Amortization of intangible assets
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.5Total operating expenses
    
    
    59.6
    
    
    
    46.7
    
    
    
    59.5Loss from operations
    
    
    (25.6
    )
    
    
    (23.2
    )
    
    
    (34.0
    )Other income (expense), net
    
    
    
    
    
    
    0.6
    
    
    
    0.4Loss before income taxes
    
    
    (25.6
    )
    
    
    (22.6
    )
    
    
    (33.6
    )Income tax provision
    
    
    0.2
    
    
    
    0.1
    
    
    
    9.3Net loss
    
    
    (25.7
    )
    
    
    (22.6
    )
    
    
    (42.9
    )
 20




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Critical Accounting Policies
  Revenue Recognition.
   Accounting for Revenue in Multiple-Deliverable Arrangements
      Accounting for Non-Monetary Transactions
  Warranty Reserve
 21




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##### Table of Contents



Sales Returns Reserve.
 Valuation Allowances.
    Valuation of Goodwill and Intangible Assets.
  
    
    significant underperformance relative to projected future operating results;
    
    significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
    
    significant negative industry or economic trends.
     22




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Recent Accounting Pronouncements
         23




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##### Table of Contents



ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
     24




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS
 INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    26Consolidated Balance Sheets
    
    
    27Consolidated Statements of Operations
    
    
    28Consolidated Statements of Comprehensive Income (Loss)
    
    
    29Consolidated Statements of Stockholders Equity
    
    
    30Consolidated Statements of Cash Flows
    
    
    31Notes to Consolidated Financial Statements
    
    
    32Valuation and Qualifying Accounts
    
    
    66
 25




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   Consolidated financial statements and financial statement schedule
   Internal control over financial reporting
 Internal Control 
Integrated Framework
     1.
    
    The Company did not maintain a sufficient complement of personnel
with an appropriate level of accounting knowledge, experience and training in the
application of generally accepted accounting principles commensurate with the
Companys financial reporting requirements. Specifically, the Company lacked
sufficient finance and accounting staff with adequate depth and skill in the
application of generally accepted accounting principles with respect to the
period-end external financial reporting process including the completeness and accuracy of segment footnote disclosures, stock-based compensation
footnote disclosures, the presentation of restricted cash and deferred costs in the
consolidated financial statements, and the accurate determination of weighted
average shares. In addition, certain account reconciliations were not performed or
reviewed timely. This control deficiency resulted in audit adjustments to 2005
annual consolidated financial statements. Additionally, this control deficiency
could result in a misstatement of substantially all accounts and disclosures which
would result in a material misstatement of annual or interim financial statements
that would not be prevented or detected. Accordingly, management has determined
that this control deficiency constitutes a material weakness.
 2.
    
    The Company did not maintain effective controls over the completeness
and accuracy of inventory. Specifically, the Company did not have effective
controls over the physical inventory count process to ensure that individuals
involved in the physical inventory count were properly trained and supervised and
that discrepancies between quantities counted and the accounting records were
properly investigated. Further, the Company did not have effective controls over
the updating of accounting records to reflect the actual quantities counted during
the physical inventory process. This control deficiency resulted in audit
adjustments to the 2005 consolidated financial statements. Additionally, this
control deficiency could result in a misstatement of inventory and cost of goods
sold that would result in a material misstatement to the Companys interim or
annual consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes a
material weakness.
  Internal Control  Integrated Framework Internal Control  Integrated Framework
  
 26




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SOMERA COMMUNICATIONS, INC.
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 December 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,508
    
    
    $
    7,654Restricted cash  short-term
    
    
    105
    
    
    
    Short-term investments
    
    
    11,200
    
    
    
    32,757Accounts receivable, net of allowance for doubtful accounts of $443 and $574 at December
31, 2005 and 2004, respectively
    
    
    13,773
    
    
    
    16,217Inventories, net
    
    
    15,157
    
    
    
    9,767Deferred cost
    
    
    1,802
    
    
    
    260Other current assets
    
    
    1,410
    
    
    
    1,876Total current assets
    
    
    49,955
    
    
    
    68,531Property and equipment, net
    
    
    3,834
    
    
    
    4,600Other assets
    
    
    3,899
    
    
    
    148Restricted cash  long-term
    
    
    500
    
    
    
    Goodwill
    
    
    
    
    
    
    1,760Intangible assets, net
    
    
    
    
    
    
    50Total assets
    
    $
    58,188
    
    
    $
    75,089LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,865
    
    
    $
    12,396Accrued compensation
    
    
    1,701
    
    
    
    2,503Other accrued liabilities
    
    
    8,999
    
    
    
    11,139Deferred revenue
    
    
    3,232
    
    
    
    723Total current liabilities
    
    
    28,797
    
    
    
    26,761Commitments (Note 6)Stockholders equity:Preferred stock ($0.001 par value per share; authorized 20,000 shares, no shares issued)Common stock ($0.001 par value per share; authorized 200,000 shares, shares issued and
outstanding: 50,278 and 49,872 at December 31, 2005 and 2004, respectively)
    
    
    49
    
    
    
    49Additional paid-in capital
    
    
    75,154
    
    
    
    74,652Unearned stock-based compensation
    
    
    (120
    )
    
    
    (72
    )Accumulated other comprehensive income (loss)
    
    
    274
    
    
    
    (191
    )Accumulated deficit
    
    
    (45,966
    )
    
    
    (26,110
    )Total stockholders equity
    
    
    29,391
    
    
    
    48,328Total liabilities and stockholders equity
    
    $
    58,188
    
    
    $
    75,089
  27




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SOMERA COMMUNICATIONS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Revenues:Equipment revenue
    
    $
    66,622
    
    
    $
    87,120
    
    
    $
    119,729Service and program revenue
    
    
    10,506
    
    
    
    12,914
    
    
    
    16,838Total revenues
    
    
    77,128
    
    
    
    100,034
    
    
    
    136,567Cost of revenues:Equipment cost of revenue
    
    
    45,066
    
    
    
    67,008
    
    
    
    88,458Service and program cost of revenue
    
    
    5,803
    
    
    
    9,479
    
    
    
    13,298Total cost of revenues
    
    
    50,869
    
    
    
    76,487
    
    
    
    101,756Gross Profit
    
    
    26,259
    
    
    
    23,547
    
    
    
    34,811Operating expenses:Sales and marketing
    
    
    25,103
    
    
    
    22,258
    
    
    
    26,812General and administrative
    
    
    17,801
    
    
    
    24,435
    
    
    
    28,349Goodwill impairment
    
    
    1,760
    
    
    
    
    
    
    
    24,825Asset impairment
    
    
    
    
    
    
    
    
    
    
    522Amortization of intangible assets
    
    
    50
    
    
    
    67
    
    
    
    751Other operating expenses
    
    
    1,256
    
    
    
    
    
    
    
    Total operating expenses
    
    
    45,970
    
    
    
    46,760
    
    
    
    81,259Loss from operations
    
    
    (19,711
    )
    
    
    (23,213
    )
    
    
    (46,448
    )Other income (expense), net
    
    
    (10
    )
    
    
    643
    
    
    
    604Loss before income taxes
    
    
    (19,721
    )
    
    
    (22,570
    )
    
    
    (45,844
    )Income tax provision
    
    
    135
    
    
    
    58
    
    
    
    12,666Net loss
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )Net loss per sharebasic and diluted
    
    $
    (0.40
    )
    
    $
    (0.45
    )
    
    $
    (1.19
    )Weighted average sharesbasic and diluted
    
    
    50,223
    
    
    
    49,739
    
    
    
    49,126
  28




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SOMERA COMMUNICATIONS, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Net loss
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )Other comprehensive income (loss):Foreign currency translation (losses) gains
    
    
    419
    
    
    
    (117
    )
    
    
    120Unrealized gain (loss) on investments
    
    
    46
    
    
    
    (79
    )
    
    
    Reclassification adjustments for gains (losses) included in net earnings
    
    
    
    
    
    
    
    
    
    
    (1
    )Other comprehensive income (loss)
    
    
    465
    
    
    
    (196
    )
    
    
    119Comprehensive loss
    
    $
    (19,391
    )
    
    $
    (22,824
    )
    
    $
    (58,391
    )
  29




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
 Accumulated
    
    
    RetainedAdditional
    
    
    Unearned
    
    
    Other
    
    
    EarningsPaid-in
    
    
    Stock-Based
    
    
    Comprehensive
    
    
    (AccumulatedCommon Stock
    
    
    Capital
    
    
    Compensation
    
    
    Income (loss)
    
    
    Deficit)
    
    
    TotalNumber
    
    
    ValueBalance, December 31, 2002
    
    
    48,904
    
    
    $
    49
    
    
    $
    73,145
    
    
    $
    (8
    )
    
    $
    (114
    )
    
    $
    55,028
    
    
    $
    128,100Issuance of common stock through employee stock
purchase plan
    
    
    298
    
    
    
    
    
    
    
    320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320Warrants issued in exchange for services
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Issuance of common stock in exchange for services
    
    
    60
    
    
    
    
    
    
    
    104
    
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    Compensation expense related to acceleration of stock
options
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Amortization of unearned stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Unrealized gain/(loss) on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    120Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,510
    )
    
    
    (58,510
    )Balance, December 31, 2003
    
    
    49,262
    
    
    $
    49
    
    
    $
    73,663
    
    
    $
    (98
    )
    
    $
    5
    
    
    $
    (3,482
    )
    
    $
    70,137Issuance of common stock through employee stock
purchase plan
    
    
    189
    
    
    
    
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232Warrants issued in exchange for services
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Issuance of common stock through stock option exercises
    
    
    421
    
    
    
    
    
    
    
    744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744Amortization of unearned stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Unrealized gain/(loss) on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    (117
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,628
    )
    
    
    (22,628
    )Balance, December 31, 2004
    
    
    49,872
    
    
    $
    49
    
    
    $
    74,652
    
    
    $
    (72
    )
    
    $
    (191
    )
    
    $
    (26,110
    )
    
    $
    48,328Issuance of common stock through employee stock
purchase plan
    
    
    126
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129Restricted stock and options issued in exchange for services
    
    
    90
    
    
    
    
    
    
    
    126
    
    
    
    (126
    )
    
    
   
    
    
    
    
    
    
    
    Issuance of common stock through stock option exercises
    
    
    190
    
    
    
    
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247Amortization of unearned stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Unrealized gain/(loss) on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    46Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419
    
    
    
    
    
    
    
    419Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,856
    )
    
    
    (19,856
    )Balance, December 31, 2005
    
    
    50,278
    
    
    $
    49
    
    
    $
    75,154
    
    
    $
    (120
    )
    
    $
    274
    
    
    $
    (45,966
    )
    
    $
    29,391
  30




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SOMERA COMMUNICATIONS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Year ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    2,859
    
    
    
    3,511
    
    
    
    4,471Provision for doubtful accounts
    
    
    665
    
    
    
    568
    
    
    
    1,221Provision for excess and obsolete inventories, sales returns and warranty obligations
    
    
    3,039
    
    
    
    7,264
    
    
    
    8,583Deferred tax provision
    
    
    87
    
    
    
    
    
    
    
    24,813Warrants issued in exchange for services
    
    
    
    
    
    
    13
    
    
    
    51Accelerated vesting of stock options
    
    
    
    
    
    
    
    
    
    
    43Non-cash goodwill and intangible asset write-down
    
    
    1,760
    
    
    
    
    
    
    
    25,329Amortization of stock-based compensation
    
    
    78
    
    
    
    26
    
    
    
    14Forgiveness of loans to officers
    
    
    
    
    
    
    
    
    
    
    267(Gain) loss on disposal of assets
    
    
    (217
    )
    
    
    318
    
    
    
    Foreign exchange loss (gain)
    
    
    792
    
    
    
    (94
    )
    
    
    (468
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,252
    
    
    
    2,798
    
    
    
    3,821Inventories
    
    
    (8,226
    )
    
    
    (1,495
    )
    
    
    5,763Income tax receivable
    
    
    
    
    
    
    6,818
    
    
    
    (4,138
    )Other current assets
    
    
    266
    
    
    
    1,793
    
    
    
    (298
    )Deferred cost
    
    
    (1,576
    )
    
    
    555
    
    
    
    (128
    )Other assets
    
    
    97
    
    
    
    (31
    )
    
    
    221Accounts payable
    
    
    2,746
    
    
    
    (2,124
    )
    
    
    (5,390
    )Accrued compensation
    
    
    (801
    )
    
    
    (975
    )
    
    
    373Deferred revenue
    
    
    2,554
    
    
    
    (646
    )
    
    
    (4,314
    )Other accrued liabilities
    
    
    (2,601
    )
    
    
    (331
    )
    
    
    (1,171
    )Net cash (used in) provided by operating activities
    
    
    (17,082
    )
    
    
    (4,660
    )
    
    
    553Cash flows from investing activities:Purchase of other long term assets
    
    
    (4,184
    )
    
    
    
    
    
    
    Acquisition of property and equipment
    
    
    (1,701
    )
    
    
    (2,423
    )
    
    
    (2,811
    )Proceeds from disposal of property and equipment
    
    
    273
    
    
    
    4
    
    
    
    Purchase of short-term investments
    
    
    (28,387
    )
    
    
    (51,433
    )
    
    
    (11,600
    )Sale of short-term investments
    
    
    49,989
    
    
    
    34,797
    
    
    
    7,600Increase in restricted cash
    
    
    (605
    )
    
    
    
    
    
    
    Repayment of loan to officer
    
    
    
    
    
    
    
    
    
    
    1,129Earn-out payment related to Compass Telecom acquisition
    
    
    
    
    
    
    
    
    
    
    (2,900
    )Net cash (used in) provided by investing activities
    
    
    15,385
    
    
    
    (19,055
    )
    
    
    (8,582
    )Cash flows from financing activities:Proceeds from employee stock purchase plan
    
    
    129
    
    
    
    232
    
    
    
    320Proceeds from stock option exercises
    
    
    247
    
    
    
    744
    
    
    
    Net cash provided by financing activities
    
    
    376
    
    
    
    976
    
    
    
    320Net decrease in cash and cash equivalents
    
    
    (1,321
    )
    
    
    (22,739
    )
    
    
    (7,709
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    175
    
    
    
    (249
    )
    
    
    120Cash and cash equivalents, beginning of year
    
    
    7,654
    
    
    
    30,642
    
    
    
    38,231Cash and cash equivalents, end of year
    
    $
    6,508
    
    
    $
    7,654
    
    
    $
    30,642Supplemental disclosures of cash flow information:Cash paid during the period for interest
    
    $
    
    
    
    $
    18
    
    
    $
    25Income taxes paid
    
    $
    74
    
    
    $
    69
    
    
    $
    95
  31




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SOMERA COMMUNICATIONS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1The Company:
       
    
    Take advantage of business opportunities, including, but not limited to, more
international expansion or acquisitions of complementary businesses;
    
    Develop and maintain higher inventory levels;
    
    Gain access to new product lines;
    
    Develop new services;
    
    Respond to competitive pressures; or
    
    Fund general operations.
     Note 2Summary of Significant Accounting Policies:
 Basis of Presentation
  Principles of Consolidation
  Use of Estimates
  Revenue Recognition
    Accounting for Revenue in Multiple-Deliverable Arrangements
  32




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SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
     Accounting for Non-Monetary Transactions
  Income Taxes
   Concentration of Credit Risk and Other Risks and Uncertainties
    Foreign Currency Translation
  Fair Value of Financial Instruments
  Cash and Cash Equivalents
  33




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SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Short-Term Investments
  Accounting for Certain Investments in Debt and Equity Securities,
 Inventories
  Property and Equipment
   Furniture & Fixtures
    
    5 yearsComputer & Phone Equipment
    
    3 yearsSoftware
    
    3 yearsWarehouse Equipment
    
    5 yearsLeasehold improvements
    
    Lesser of 7 years or life of the lease
 Goodwill and Intangible Assets
      Warranty Reserve
  34




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Sales Returns Reserve
  Research and Development
  Stock-based Compensation
   Year Ended December 31,2005
    
    
    2004
    
    
    2003Net lossas reported
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )Add: Stock-based employee compensation expensed in the financial statements, net of related tax effects
    
    
    78
    
    
    
    26
    
    
    
    57Deduct: Stock-based employee compensation expense determined under fair value based method for all
award, net of related tax effects
    
    
    (3,412
    )
    
    
    (1,485
    )
    
    
    (3,598
    )Net loss as adjusted
    
    $
    (23,190
    )
    
    $
    (24,087
    )
    
    $
    (62,051
    )Net loss per sharebasic and diluted as reported
    
    $
    (0.40
    )
    
    $
    (0.45
    )
    
    $
    (1.19
    )Net loss per sharebasic and diluted as adjusted
    
    $
    (0.46
    )
    
    $
    (0.48
    )
    
    $
    (1.26
    )
  Employee Stock
    
    
    Employee StockOption Plan
    
    
    Purchase Plan2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Risk-free interest rate
    
    
    3.89
    %
    
    
    3.37
    %
    
    
    3.36
    %
    
    
    3.04
    %
    
    
    1.87
    %
    
    
    1.05
    %Expected life (in years)
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    77
    %
    
    
    84
    %
    
    
    81
    %
    
    
    51
    %
    
    
    69
    %
    
    
    59
    %
 35




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Net Loss Per Share
  Year Ended December 31,2005
    
    
    2004
    
    
    2003NumeratorNet loss
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )DenominatorWeighted average sharesbasic and diluted
    
    
    50,223
    
    
    
    49,739
    
    
    
    49,126Net loss per sharebasic and diluted
    
    $
    (0.40
    )
    
    $
    (0.45
    )
    
    $
    (1.19
    )
  Reclassifications
  Recent Accounting Pronouncements
      36




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
     Note 3Acquisitions:
 Compass Telecom, LLC.
    Current assets
    
    $
    2,708Property and equipment
    
    
    315Other long-term assets
    
    
    32Assumed liabilities
    
    
    (1,486
    )Customer contract
    
    
    654Non-compete agreements
    
    
    665Goodwill
    
    
    9,509Total purchase price
    
    $
    12,397
   37




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  
    
    The decline in the overall U.S. economic growth as evidenced by the June 26, 2003 report
by the U.S. Department of Commerce in which they revised downward the growth in gross
domestic product (GDP) to 1.4% in the first quarter of 2003 impacted the Companys
conclusion. This revision was less than the 1.9%estimated in May 2003 reflecting the slow
down in economic activity resulting from such macro influences as the conflict with Iraq.
As the U.S. economy slowed, demand for telecommunications services also waned, further
exacerbating the downturn in the telecommunications market, reducing telecommunications
carriers capital spending and postponing network upgrades. As a result, the performance
of the outsourced services that the Compass assets provided to the Company suffered.
    
    In addition, beginning in 2002, the telecommunications industry experienced a
significant downturn resulting in many telecommunications operators reducing their
workforce and either scaling down their capital expenditures or postponing their planned
network upgrades. While, at the time of the acquisition of compass assets, the Company
believed that the outsourced services that Compass performed would continue to be in demand
by telecommunications carriers and actually grow in 2003 and going forward due to workforce
reductions at the telecommunications carriers and other factors, the Company found that the
services in question actually declined. The Company believed this decline was a result of
the significant scaling down of telecommunications carriers capital expenditures and
continued postponement of planned network upgrades, which more than offset the carriers
need for outsourced services. Further while the Company was aware of the economic downturn
in the telecommunications market at the time of the acquisition of the Compass assets, the
Company did not anticipate the severity of the downturn nor the duration.
    
    Further, the Company experienced significant declines in revenues. Revenues were
$50.495 million in the third quarter of 2002, the quarter before the Compass acquisition.
Revenues continued to decline in 2003 and were $35.954 million for the quarter ended June
30, 2003, which represents a 28.8%decline in total revenues during that nine-month period.
Services revenue were $7.2 million in the fourth quarter of 2002, $3.6 million in the first
quarter of 2003, and $4.9 million in the second quarter of 2003, and $4.4 million in the
third quarter of 2003. In fact, the revenues related to the services business were greater
in fiscal year 2002 (which included only one partial quarter of revenues related to the
Compass assets) than in fiscal year 2003. The Company had anticipated significant revenue
growth out of the services reporting unit, specifically as a result of the Compass
acquisition, during these periods.
    
    Finally, in June 2003, based upon forecasts provided by the Companys employees in
charge of the Services reporting unit, we did not believe that we would achieve acceptable
revenue growth with respect to the Services reporting unit and forecasted significant
declines in profitability. In fact, from the time of the acquisition of the Compass assets
to the time of the goodwill impairment charges related to such assets profit projections
for that reporting unit declined 10% rather than increasing by the projected 29% due to the
fact that certain key carriers unexpectedly elected to continue to reduce capital
expenditures and cancel or postpone planned network upgrades. At the time of the goodwill
impairment charge, this reduction in profit projections was expected to continue in to the
foreseeable future.
   Note 4Balance Sheet Accounts (in thousands):
 December 31,
    
    
    December 31,Asset Class
    
    2005
    
    
    2004Property and Equipment, Net:Computer and telephone equipment
    
    $
    3,028
    
    
    $
    3,039Software
    
    
    3,417
    
    
    
    3,205Office equipment and furniture
    
    
    633
    
    
    
    731Warehouse equipment
    
    
    1,983
    
    
    
    1,623Leasehold improvements
    
    
    1,711
    
    
    
    1,53310,772
    
    
    
    10,131Less accumulated depreciation
    
    
    (6,938
    )
    
    
    (5,531
    )$
    3,834
    
    
    $
    4,600
  38




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 December 31,
    
    
    December 31,2005
    
    
    2004Inventories held for sale
    
    $
    19,815
    
    
    $
    15,360Less: Reserve for excess and obsolete inventory
    
    
    (4,658
    )
    
    
    (5,593
    )Inventories, net
    
    $
    15,157
    
    
    $
    9,767
  December 31,
    
    
    December 31,2005
    
    
    2004Other Accrued Liabilities:Restructuring accrual (see note 11)
    
    $
    22
    
    
    $
    288Warranty reserve (see note 8)
    
    
    478
    
    
    
    1,128Income and other taxes payable
    
    
    4,923
    
    
    
    4,843Other
    
    
    3,576
    
    
    
    4,880$
    8,999
    
    
    $
    11,139
   Note 5Goodwill and Intangible Assets:
      39




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
   GoodwillBalance at December 31, 2002
    
    $
    26,585AdjustmentImpairment
    
    
    (24,825
    )Balance at December 31, 2003 and 2004
    
    $
    1,760Adjustment
 Impairment
    
    
    (1,760
    )Balance at December 31, 2005
    
    $
    
   Customer
    
    
    Non-competecontracts
    
    
    agreement
    
    
    TotalOriginal Cost at December 31, 2001
    
    $
    1,499
    
    
    $
    665
    
    
    $
    2,164Amortization
    
    
    (643
    )
    
    
    (131
    )
    
    
    (774
    )Balance at December 31, 2002
    
    $
    856
    
    
    $
    534
    
    
    $
    1,390Impairment
    
    
    (236
    )
    
    
    (286
    )
    
    
    (522
    )Amortization
    
    
    (620
    )
    
    
    (131
    )
    
    
    (751
    )Balance at December 31, 2003
    
    $
    
    
    
    $
    117
    
    
    $
    117Amortization
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Balance at December 31, 2004
    
    $
    
    
    
    $
    50
    
    
    $
    50Amortization
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )Balance at December 31, 2005
    
    $
    
    
    
    $
    
    
    
    $
    
  Note 6Commitments and Contingencies:
    40




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterGross restructuring related leases (see note 11)
    
    $
    22
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Leases
    
    
    1,989
    
    
    
    1,945
    
    
    
    1,973
    
    
    
    1,907
    
    
    
    1,120
    
    
    
    1,739Total commitments
    
    $
    2,011
    
    
    $
    1,945
    
    
    $
    1,973
    
    
    $
    1,907
    
    
    $
    1,120
    
    
    $
    1,739
   Note 7Stockholders Equity:
        41




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Stock Option Plan Summary
  WeightedAverageAvailable
    
    
    Outstanding
    
    
    ExerciseFor Grant
    
    
    Options
    
    
    PriceBalances, December 31, 2002
    
    
    873,050
    
    
    
    13,294,576
    
    
    $
    6.18Annual increase
    
    
    1,956,086
    
    
    
    
    
    
    
    Options granted
    
    
    (3,606,250
    )
    
    
    3,606,250
    
    
    
    1.35Options exercised
    
    
    
    
    
    
    
    
    
    
    Options canceled
    
    
    7,616,855
    
    
    
    (7,616,855
    )
    
    
    5.42Balances, December 31, 2003
    
    
    6,839,741
    
    
    
    9,283,971
    
    
    $
    4.95Options granted
    
    
    (4,475,000
    )
    
    
    4,475,000
    
    
    
    1.57Options exercised
    
    
    
    
    
    
    (420,762
    )
    
    
    2.69Options canceled
    
    
    3,757,174
    
    
    
    (5,980,174
    )
    
    
    4.68Balances, December 31, 2004
    
    
    6,121,915
    
    
    
    7,358,035
    
    
    $
    3.50Annual Increase
    
    
    1,995,591
    
    
    
    Options granted
    
    
    (3,524,500
    )
    
    
    3,524,500
    
    
    
    1.35Options exercised
    
    
    
    
    
    
    (190,000
    )
    
    
    1.44Options canceled
    
    
    2,413,801
    
    
    
    (3,737,801
    )
    
    
    4.13Balances, December 31, 2005
    
    
    7,006,807
    
    
    
    6,954,734
    
    
    $
    2.20
   Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    Life in Years
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.90 - $1.08
    
    
    774,458
    
    
    
    9.18
    
    
    $
    1.02
    
    
    
    59,442
    
    
    $
    1.08$1.26 - $1.88
    
    
    4,942,187
    
    
    
    8.77
    
    
    
    1.43
    
    
    
    3,613,751
    
    
    
    1.44$2.60 - $3.00
    
    
    406,485
    
    
    
    7.46
    
    
    
    2.83
    
    
    
    406,485
    
    
    
    2.83$4.50 - $8.50
    
    
    338,604
    
    
    
    5.50
    
    
    
    6.28
    
    
    
    338,604
    
    
    
    6.28$10.75-$13.50
    
    
    358,000
    
    
    
    4.26
    
    
    
    10.90
    
    
    
    358,000
    
    
    
    10.906,819,734
    
    
    
    8.34
    
    
    $
    2.20
    
    
    
    4,776,282
    
    
    $
    2.61
   Employee Stock Purchase Plan
  42




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Note 8Warranties and Financial Guarantees:
    2005
    
    
    2004Balance as of beginning of year
    
    $
    1,128
    
    
    $
    915Provision for warranty liability
    
    
    443
    
    
    
    2,132Settlements
    
    
    (1,093
    )
    
    
    (1,919
    )Balance as of end of year
    
    $
    478
    
    
    $
    1,128
 Financial Guarantees:
  Note 9401(k) Savings Plan:
  Note 10Related Party Transactions and Loans to Officers:
      43




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Note 11Restructuring and Asset Impairment Charges:
     Balance at
    
    
    
    
    
    
    Balance at
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Payments-
    
    
    December 31,
    
    
    Payments-
    
    
    December 31,2003
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005Lease obligations
    
    $
    551
    
    
    $
    (263
    )
    
    $
    288
    
    
    $
    (266
    )
    
    $
    22Termination benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    551
    
    
    $
    (263
    )
    
    $
    288
    
    
    $
    (266
    )
    
    $
    22
  Note 12Income Taxes:
   2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    87
    
    
    $
    
    
    
    $
    (8,718
    )State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    48
    
    
    
    58
    
    
    
    71135
    
    
    
    58
    
    
    
    (8,647
    )Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    18,046State
    
    
    
    
    
    
    
    
    
    
    3,267
    
    
    
    
    
    
    
    21,313$
    135
    
    
    $
    58
    
    
    $
    12,666
 44




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  December 31,2005
    
    
    2004Deferred tax asset (liability):Property and equipment
    
    $
    345
    
    
    $
    1,165Reserves and accruals
    
    
    3,052
    
    
    
    4,357Difference in tax and book basis of net assets, net
    
    
    20,604
    
    
    
    16,854Net operating loss carryforward
    
    
    22,467
    
    
    
    11,829Tax credit carryforward
    
    
    
    
    
    
    440Total deferred tax assets
    
    
    46,468
    
    
    
    34,645Valuation allowance
    
    
    (46,468
    )
    
    
    (34,645
    )Net deferred tax asset
    
    $
    0
    
    
    $
    0
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Tax at federal statutory rate
    
    
    (35.00
    )%
    
    
    (35.00
    )%
    
    
    (35.00
    )%State taxes (net of federal tax benefit)
    
    
    (3.47
    )%
    
    
    (5.72
    )%
    
    
    (4.33
    )%Non-deductible goodwill
    
    
    3.12
    %
    
    
    0.00
    %
    
    
    8.48
    %Valuation allowance
    
    
    34.30
    %
    
    
    40.61
    %
    
    
    61.56
    %Other
    
    
    1.73
    %
    
    
    0.37
    %
    
    
    (3.02
    )%Effective tax rate
    
    
    0.69
    %
    
    
    0.26
    %
    
    
    27.69
    %
  Year Ended December 31,2005
    
    
    2004
    
    
    2003U.S.
    
    $
    (15,300
    )
    
    $
    (20,514
    )
    
    $
    (45,319
    )Non-U.S
    
    
    (4,421
    )
    
    
    (2,056
    )
    
    
    (525
    )$
    (19,721
    )
    
    $
    (22,570
    )
    
    $
    (45,844
    )
    45




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 13Segment Information:
   46




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  For the year ended December 31,2005
    
    
    2004
    
    
    2003Net revenue:Equipment revenue:New equipment
    
    $
    15,565
    
    
    $
    20,181
    
    
    $
    28,816Re-used equipment
    
    
    51,057
    
    
    
    66,939
    
    
    
    90,913Total equipment revenue
    
    
    66,622
    
    
    
    87,120
    
    
    
    119,729Service and program revenue:RepairPLUS
    
    
    4,844
    
    
    
    12,914
    
    
    
    16,838All other
    
    
    5,662
    
    
    
    
    
    
    
    Total Service and program revenue
    
    
    10,506
    
    
    
    12,914
    
    
    
    16,838Total Net revenue
    
    
    77,128
    
    
    
    100,034
    
    
    
    136,567Gross profit:Equipment gross profit:New equipment
    
    
    2,279
    
    
    
    2,727
    
    
    
    3,158Re-used equipment
    
    
    19,277
    
    
    
    17,385
    
    
    
    28,113Total Equipment gross profit
    
    
    21,556
    
    
    
    20,112
    
    
    
    31,271Service and
program gross profit:RepairPLUS
    
    
    3,112
    
    
    
    3,435
    
    
    
    3,540All other
    
    
    1,591
    
    
    
    
    
    
    
    Total Service and program gross profit
    
    
    4,703
    
    
    
    3,435
    
    
    
    3,540Total Gross profit
    
    
    26,259
    
    
    
    23,547
    
    
    
    34,811Operating expenses:Sales and marketing
    
    
    25,103
    
    
    
    22,258
    
    
    
    26,812General and administrative
    
    
    17,801
    
    
    
    24,435
    
    
    
    28,349Impairment of goodwill and intangible assets
    
    
    1,760
    
    
    
    
    
    
    
    25,347Amortization of intangible assets
    
    
    50
    
    
    
    67
    
    
    
    751Other operating expenses
    
    
    1,256
    
    
    
    
    
    
    
    Total operating expenses
    
    
    45,970
    
    
    
    46,760
    
    
    
    81,259Loss from operations
    
    
    (19,711
    )
    
    
    (23,213
    )
    
    
    (46,448
    )Other income (expense), net
    
    
    (10
    )
    
    
    643
    
    
    
    604Loss before income taxes
    
    
    (19,721
    )
    
    
    (22,570
    )
    
    
    (45,844
    )Income tax provision
    
    
    135
    
    
    
    58
    
    
    
    12,666Net loss
    
    $
    (19,856
    )
    
    $
    (22,628
    )
    
    $
    (58,510
    )
 47




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Net revenue:United States
    
    $
    56,814
    
    
    $
    78,197
    
    
    $
    106,546Canada
    
    
    1,295
    
    
    
    1,894
    
    
    
    1,907Latin America
    
    
    2,552
    
    
    
    3,529
    
    
    
    7,328Europe
    
    
    15,060
    
    
    
    13,998
    
    
    
    11,655Asia
    
    
    1,169
    
    
    
    1,688
    
    
    
    6,532Africa
    
    
    153
    
    
    
    728
    
    
    
    1,434Other
    
    
    85
    
    
    
    
    
    
    
    1,165Total
    
    $
    77,128
    
    
    $
    100,034
    
    
    $
    136,567
   Note 14Unaudited Quarterly Operating Results:
  Quarters EndedMarch 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2005
    
    
    2005
    
    
    2005
    
    
    2005Net sales
    
    $
    20,534
    
    
    $
    18,681
    
    
    $
    21,777
    
    
    $
    16,136Gross profit
    
    
    7,688
    
    
    
    6,270
    
    
    
    7,192
    
    
    
    5,109Operating expense
    
    
    10,837
    
    
    
    14,054
    
    
    
    11,519
    
    
    
    9,560Net loss
    
    
    (3,276
    )
    
    
    (7,931
    )
    
    
    (4,177
    )
    
    
    (4,472
    )Net loss per share
    
    $
    (0.07
    )
    
    $
    (0.16
    )
    
    $
    (0.08
    )
    
    $
    (0.09
    )
 Quarters EndedMarch 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2004
    
    
    2004
    
    
    2004
    
    
    2004Net sales
    
    $
    28,388
    
    
    $
    25,767
    
    
    $
    22,693
    
    
    $
    23,186Gross profit
    
    
    6,480
    
    
    
    6,987
    
    
    
    3,892
    
    
    
    6,188Operating expense
    
    
    10,304
    
    
    
    10,911
    
    
    
    12,614
    
    
    
    12,931Net loss
    
    
    (4,056
    )
    
    
    (3,876
    )
    
    
    (8,489
    )
    
    
    (6,207
    )Net loss per share
    
    $
    (0.08
    )
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.12
    )
 Note 15Subsequent Event:
   48




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##### Table of Contents



SOMERA COMMUNICATIONS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  49




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##### Table of Contents



ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
   Internal Control  Integrated Framework
  1.
    
    The Company did not maintain a sufficient complement of personnel with an appropriate
level of accounting knowledge, experience and training in the application of generally
accepted accounting principles commensurate with the Companys financial reporting
requirements. Specifically, the Company lacked sufficient finance and accounting staff
with adequate depth and skill in the application of generally accepted accounting
principles with respect to the period-end external financial reporting process including
the completeness and accuracy of segment footnote disclosures, stock-based compensation
footnote disclosures, the presentation of restricted cash and deferred costs in the
consolidated financial statements, and the accurate determination of
weighted average shares. In addition, certain account reconciliations were not performed or reviewed
timely. This control deficiency resulted in audit adjustments to 2005 annual consolidated
financial statements. Additionally, this control deficiency could result in a
misstatement of substantially all accounts and disclosures which would result in a
material misstatement of annual or interim financial statements that would not be
prevented or detected. Accordingly, management has determined that this control deficiency
constitutes a material weakness.2.
    
    The Company did not maintain effective controls over the completeness and accuracy of
inventory. Specifically, the Company did not have effective controls over the physical
inventory count process to ensure that individuals involved in the physical inventory
count were properly trained and supervised and that discrepancies between quantities
counted and the accounting records were properly investigated. Further, the Company did
not have effective controls over the updating of accounting records to reflect the actual
quantities counted during the physical inventory process. This control deficiency
resulted in audit adjustments to the 2005 consolidated financial statements.
Additionally, this control deficiency could result in a misstatement of inventory and cost
of goods sold that would result in a material misstatement to the Companys interim or
annual consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes a
material weakness.
 Internal Control  Integrated Framework
  Changes in Internal Control Over Financial Reporting
  Managements Remediation Initiatives and Interim Measures
  1.
    
    The Company will improve its controls related to the period-end financial reporting process
and adequacy of its accounting and finance department by:
 
    
    Adding experienced staff with the commensurate knowledge, experience and training
necessary to meet the Companys requirements regarding accounting and financial reporting.
    
    Increasing supervisory review of the preparation of the financial statements and
related disclosures.
 2.
    
    The Company will improve its controls over its accounting for inventory by implementing the
following:
 
    
    Beginning with the first quarter of 2006, management increased its training of all
personnel involved in the physical inventory process, particularly those individuals
performing the data entry function.
    
    The Company will implement revised written procedures for the annual physical inventory
to ensure that all inventory items are appropriately identified and accounted for.
    
    The Company has implemented enhanced review procedures by senior management of the
reconciliation process between the quantities obtained from the physical inventory tags
and the quantities obtained from the updated perpetual inventory report.
    
    The Company will improve compliance with its previously established cycle counting
process by instituting greater management oversight, providing additional training for
cycle count personnel, mandating use of specifically designed cycle count worksheets,
requiring review and approval of all cycle counts by another trained individual, and
adding secondary verification that all cycle count adjustments have been entered into the
Companys inventory system.
 
 ITEM 9B. OTHER INFORMATION
  50




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##### Table of Contents



PART III
 
 ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   Class and Year inName
    
    Age
    
    Which Term Expires
    
    PositionBarry Phelps
    
    
    59
    
    
    Class II, 2007
    
    Director and Chairman of the BoardDavid W. Heard
    
    
    37
    
    
    Class I, 2006
    
    Director, President and Chief Executive OfficerDavid A. Young
    
    
    62
    
    
    Class I, 2006
    
    DirectorCharles E. Levine
    
    
    52
    
    
    Class II, 2007
    
    DirectorCasimir S. Skrzypczak
    
    
    64
    
    
    Class III, 2008
    
    DirectorWalter G. Kortschak
    
    
    46
    
    
    Class III, 2008
    
    Director
  Barry Phelps
 David W. Heard
 David A. Young
 Charles E. Levine
 Casimir S. Skrzypczak
 Walter G. Kortschak
  51




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##### Table of Contents



Board Meetings and Committees
  CorporateGovernance andHuman Resources
    
    NominatingDirector
    
    Audit Committee
    
    Committee
    
    CommitteeBarry Phelps
    
    X
    
    XCharles E. Levine
    
    
    
    X*
    
    XWalter G. Kortschak
    
    
    
    XCasimir Skrzypczak
    
    X
    
    
    
    X*David A. Young
    
    X*
    
    
    
    X
 
 * Chairperson   Audit Committee
  Corporate Governance and Nominating Committee
  
    
    experience in business, finance or management, with a particular emphasis on experience and knowledge of Someras industry;
    
    reputation for working constructively with others;
    
    wisdom, integrity, and moral character;
    
    ability to make independent analytical inquiries;
    
    understanding of our business and willingness to devote adequate time to board duties; and
    
    absence of conflicts of interest.
   52




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##### Table of Contents



Stockholder Communication with the Board of Directors
   Corporate Governance Matters
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 11. EXECUTIVE COMPENSATION
  Summary Compensation Table
 Long TermAnnual Compensation
    
    
    Compensation AwardsOther Annual
    
    
    SecuritiesCompensation
    
    
    Underlying
    
    
    Restricted
    
    
    All OtherName and Principal Position
    
    Year
    
    Salary
    
    
    Bonus
    
    
    (1)
    
    
    Options
    
    
    Stock
    
    
    CompensationDavid W. Heard
    
    2005
    
    $
    375,000
    
    
    $
    18,750
    
    
    $
    
    
    
    
    250,000
    
    
    
    
    
    
    $
    2,840
    (2)President and Chief Executive Officer
    
    2004(3)
    
    
    245,192
    
    
    
    87,500
    
    
    
    54,625
    (4)
    
    
    1,250,000
    
    
    
    
    
    
    
    Kent Coker
    
    2005(5)
    
    $
    173,077
    
    
    $
    4,455
    
    
    $
    50,000
    (6)
    
    
    300,000
    
    
    
    
    
    
    $
    1,514
    (2)Chief Financial Officer and Corporate SecretaryMichael Foliano
    
    2005
    
    $
    205,000
    
    
    $
    7,500
    
    
    $
    
    
    
    
    75,000
    
    
    
    50,000
    (13)
    
    $
    2,656
    (2)Vice President, Operations
    
    2004(7)
    
    
    82,788
    
    
    
    
    
    
    
    54,548
    (4)
    
    
    250,000
    
    
    
    
    
    
    
    Jeremy D. Rossen
    
    2005(8)
    
    $
    195,385
    
    
    $
    7,500
    
    
    $
    29,312
    (9)
    
    
    80,000
    
    
    
    
    
    
    $
    2,211
    (2)Former Vice President, Corporate Development,
    
    2004
    
    
    199,615
    
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    General Counsel and Secretary
    
    2003
    
    
    169,615
    
    
    
    
    
    
    
    111,229
    (10)
    
    
    15,000
    
    
    
    
    
    
    
    Scott Willis
    
    2005(11)
    
    $
    132,692
    
    
    $
    
    
    
    $
    
    
    
    
    275,000
    
    
    
    
    
    
    $
    1,548
    (2)Former Senior Vice President, Global ServicesJay Hilbert
    
    2005(12)
    
    $
    214,423
    
    
    $
    2,344
    
    
    $
    
    
    
    
    375,000
    
    
    
    
    
    
    $
    1,683
    (2)Former Senior Vice President, Marketing and Sales
 
 (1)
    
    Other compensation in the form of perquisites and other personal benefits have been omitted in those cases where the aggregate amount of such perquisites and
other personal benefits constituted less than the lesser of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officer.(2)
    
    Represents the Companys 401(k) matching contribution under the 401(k) Savings Plan adopted in February 1998.(3)
    
    Mr. Heard joined Somera in May 2004.(4)
    
    Comprised of reimbursement for relocation and/or temporary housing expenses.(5)
    
    Mr. Coker joined Somera in April 2005.(6)
    
    Comprised of consulting compensation of $50,000 earned prior to Mr. Cokers employment with the company.(7)
    
    Mr. Foliano joined Somera in August 2004.(8)
    
    Mr. Rossen left Someras employment in December 2005.(9)
    
    Comprised of severance and vacation paid upon departure from company of $12,308 and $17,004, respectively.(10)
    
    Comprised primarily of commission compensation earned in Mr. Rossens previously held position with Somera.(11)
    
    Mr. Willis joined Somera in May 2005 and left Someras employment in January 2006.(12)
    
    Mr. Hilbert joined Somera in February 2005 and left Someras employment in January 2006.(13)
    
    Mr. Foliano was granted 50,000 shares of restricted stock in 2005, which vest over 4 years. These shares are available for repurchase by the Company in the
event Mr. Foliano ceases to be employed by the Company. 53




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##### Table of Contents



Option Grants and Exercises
  Option Grants in Fiscal 2005
 Individual GrantsPercent ofNumber of
    
    Total
    
    
    
    
    
    
    
    
    
    Potential Realizable ValueSecurities
    
    Options
    
    
    
    
    
    
    
    
    
    at Assumed Annual RatesUnderlying
    
    Granted to
    
    Exercise
    
    
    
    
    
    of Stock Price AppreciationOptions
    
    Employees in
    
    Price Per
    
    Expiration
    
    for Option TermName
    
    Granted (1)
    
    2005 (2)
    
    Share (3)
    
    Date
    
    5%
    
    10%David W. Heard (4)
    
    
    250,000
    
    
    
    7.47
    %
    
    
    $1.44
    
    
    
    02/16/2015
    
    
    $
    226,402
    
    
    $
    573,747Kent Coker
    
    
    300,000
    
    
    
    8.97
    %
    
    
    $1.58
    
    
    
    04/01/2015
    
    
    
    298,096
    
    
    
    755,434Michael Foliano
    
    
    75,000
    
    
    
    2.24
    %
    
    
    $1.34
    
    
    
    01/06/2015
    
    
    
    63,204
    
    
    
    160,171Jeremy D. Rossen
    
    
    80,000
    
    
    
    2.39
    %
    
    
    $1.34
    
    
    
    01/06/2015
    
    
    
    67,418
    
    
    
    170,849Scott Willis
    
    
    275,000
    
    
    
    8.22
    %
    
    
    $1.39
    
    
    
    05/31/2015
    
    
    
    240,395
    
    
    
    609,208Jay Hilbert
    
    
    375,000
    
    
    
    11.21
    %
    
    
    $1.44
    
    
    
    02/16/2015
    
    
    
    339,603
    
    
    
    860,621
 
 (1)
    
    Except as otherwise provided herein, twenty-five percent (25%) of the shares issuable upon
exercise of options granted under the Companys 1999 Stock Option Plan generally become vested
on the first anniversary of the vesting commencement date and the balance generally vests at
the rate of 1/36th of the shares for each month thereafter. A portion of each of these
options will accelerate upon a change of control or termination of the optionees employment.
See Employment Agreements for further descriptions of these employee benefits.(2)
    
    Based on the aggregate of options to purchase 3,344,500 shares of common stock granted to
employees in 2005.(3)
    
    Options were granted at an exercise price equal to the deemed fair market value of the
Companys common stock on the date of the grant, as determined by the board.(4)
    
    One hundred percent (100%) of the shares issuable upon exercise of options granted under this
option shall become vested on the sixth anniversary of the vesting commencement date, subject
to accelerated vesting based upon Somera company performance objectives. Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
 Number of Securities Underlying
    
    
    Value of UnexercisedShares
    
    
    
    
    
    
    Unexercised Options at
    
    
    In-The-Money Options atAcquired on
    
    
    Value
    
    
    December 31, 2005
    
    
    December 31, 2005 (1)Name
    
    Exercise
    
    
    Realized
    
    
    Exercisable
    
    
    Unexercisable (2)
    
    
    Exercisable
    
    
    UnexercisableDavid W. Heard
    
    
    
    
    
    
    
    
    
    
    395,833
    
    
    
    1,104,167
    
    
    $
    
    
    
    $
    Kent Coker
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    Michael Foliano
    
    
    
    
    
    
    
    
    
    
    325,000
    
    
    
    
    
    
    
    
    
    
    
    Jeremy D. Rossen
    
    
    
    
    
    
    
    
    
    
    216,875
    
    
    
    
    
    
    
    
    
    
    
    Scott Willis
    
    
    
    
    
    
    
    
    
    
    275,000
    
    
    
    
    
    
    
    
    
    
    
    Jay Hilbert
    
    
    
    
    
    
    
    
    
    
    375,000
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    The value of unexercised, in-the-money options is the difference between the exercise
price of the options and the fair market value of the Companys Common Stock at December
31, 2005, or $0.78 per share.(2)
    
    In December 2005, the Companys Board of Directors approved the accelerated vesting of
all unvested stock options under the 1999 Stock Option Plan having an exercise price of
$1.25 per share or greater previously awarded to the Companys employees, including certain
executive officers under the Companys equity compensation plans, except that no stock
options held by any of the Companys non-employee directors, Chief Executive Officer or
consultants were subject to the acceleration. Equity Compensation Plan Information
  Number of securitiesremaining available forNumber of securities
    
    
    Weighted-average
    
    
    future issuance underto be issued upon
    
    
    exercise price of
    
    
    equity compensationexercise of
    
    
    outstanding
    
    
    plans (excludingoutstanding options,
    
    
    options, warrants
    
    
    securities reflected inPlan Category
    
    warrants and rights
    
    
    and rights
    
    
    column (A))Equity compensation plans approved by
security holders (1)(2)
    
    
    6,954,734
    
    
    
    $2.20
    
    
    
    7,006,807
 
 (1)
    
    Consists of the following equity compensation plans:1999 Stock Option Plan and 1999 Employee Stock Purchase Plan.(2)
    
    The 1999 Stock Option Plan incorporates an evergreen formula pursuant to which, on the first
day of each of the Companys fiscal years, the number of shares available for future issuance
under the 1999 Stock Option Plan automatically increases by the lesser of 4.0% of the total
number of shares of the Companys 54




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##### Table of Contents



Common Stock then outstanding, 2,500,000 shares of the Companys Common Stock, or other amount
as determined by the Companys Board of Directors. The 1999 Employee Stock Purchase Plan
incorporates an evergreen provision pursuant to which, on the first day of each of the Companys
fiscal years, the aggregate number of shares reserved for issuance under the plan automatically
increases by that number of shares of the Company Common Stock required to restore the number
of shares of the Companys Common Stock to the amount initially reserved under the 1999 Employee
Stock Purchase Plan. Compensation of Directors
  Human Resources Committee Interlocks and Insider Participation
  Employment Arrangements
 David W. Heard
  
    
    Mr. Heard is an at-will employee of Somera, serving in the role as President and Chief Executive Officer.
    
    Mr. Heards annual base salary is $375,000.
    
    Mr. Heard is eligible to participate in Someras operating income bonus plan, up to an
amount equal to $175,000, based upon Someras performance and profitability. In addition,
on Mr. Heards six-month anniversary with Somera, he was entitled to receive $87,500 of
this bonus.
    
    Mr. Heard received (i) a stock option to purchase 1,000,000 shares of Someras common
stock, which option will vest as to 25% of the shares subject to the option one year after
the date of grant, and the balance generally vests at the rate of 1/36th of the shares subject to the option monthly thereafter so that the option will be fully vested and
exercisable four years from the date of grant, and (ii) a stock option to purchase 250,000,
which option will vest as to 100% of the shares subject to the option six years after the
date of grant, subject to accelerated vesting based upon Somera company performance
objectives. Both such options are subject to Mr. Heards continued service to Somera
during such time period.
    
    Mr. Heard was entitled to receive relocation and temporary living reimbursement, up to
$5,000 per month, for a period not to exceed one year.
    
    If Mr. Heards employment terminates as a result of constructive termination or other
than voluntarily or for cause, and he signs a standard release of claims, then he will be
entitled to receive severance pay in the amount of twelve months of his base salary, an
amount equal to the bonus amounts earned and paid to Mr. Heard for the four quarters
preceding his termination, and accelerated vesting as to 25% of the shares subject to Mr.
Heards option to purchase 1,000,000 shares of Someras common stock, except as provided
below. If Mr. Heards employment terminates as a result of constructive termination or
other than voluntarily or for cause, Somera materially changes the nature of its business
(other than changes approved by Mr. Heard), Mr. Heard has been employed for at least
twenty-four months, and he signs a standard release of claims, then he will be entitled to
receive severance pay in the amount of eighteen months of his base salary, an amount equal
to the bonus amounts earned and paid to Mr. Heard for the six quarters preceding his
termination and accelerated vesting as to 37.5% of the shares subject to Mr. Heards option
to purchase 1,000,000 shares of Someras common stock, in lieu of the amount described in
the preceding sentence.
    
    If within twelve months following a change of control involving Somera, Mr. Heard
terminates his employment as a result of a constructive termination or Somera or
successor company terminates his employment for other than cause, death or disability,
then 100% of the shares subject to Mr. Heards option to purchase 1,000,000 shares of
Someras common stock shall immediately vest and become exercisable at such time.
    
    Mr. Heards right to receive the severance benefits listed above shall be conditioned on
his adhering to non-competition and non-solicitation provisions for the twelve-month period
following any termination of his employment with Somera.
 Kent Coker
  
    
    Mr. Coker is an at-will employee of Somera, serving in the role as Senior Vice President and Chief Financial Officer.
    
    Mr. Cokers annual base salary is $225,000.
    
    Mr. Coker is eligible to participate in Someras operating income bonus plan, up to an
amount equal to $90,000, based upon Someras performance and
profitability.
 55




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##### Table of Contents




    
    Mr. Coker is eligible to receive (subject to the approval of Someras Board) a stock
option to purchase 300,000 shares of Someras common stock, which option will vest as to
25% of the shares subject to the option one year after the date of grant, and as to
1/48th of the shares subject to the option monthly thereafter so that the option
will be fully vested and exercisable four years from the date of grant, subject to Mr.
Cokers continued service to Somera during such time period.
    
    If Mr. Cokers employment terminates as a result of constructive termination or other
than voluntarily or for cause, (and he signs a standard release of claims), then he will
be entitled to receive severance pay in the amount of six months of his base salary.
    
    If within twelve months following a change of control involving Somera, Mr. Coker
terminates his employment as a result of a constructive termination or Somera or
successor company terminates his employment for other than cause, death or disability,
then 50% of the shares subject to any unvested options granted to him shall immediately
vest and become exercisable at such time.
    
    Mr. Cokers right to receive the severance benefits listed above shall be conditioned on
his adhering to non-competition and non-solicitation provisions for the twelve-month period
following any termination of his employment with Somera.
 Michael Foliano
  
    
    Mr. Foliano is an at-will employee of Somera, serving in the role as Vice President of Operations.
    
    Mr. Folianos annual base salary is $205,000.
    
    Mr. Foliano is eligible to participate in Someras operating income bonus plan, up to an
amount equal to $100,000, based upon Someras performance and profitability.
    
    Mr. Foliano received a stock option to purchase 250,000 shares of Someras common stock,
which option will vest as to 25% of the shares subject to the option one year after the
date of grant, and as to 1/48th of the shares subject to the option monthly
thereafter so that the option will be fully vested and exercisable four years from the date
of grant, subject to Mr. Folianos continued service to Somera during such time period.
    
    If Mr. Folianos employment terminates as a result of constructive termination or
other than voluntarily or for cause, (and he signs a standard release of claims), then he
will be entitled to receive severance pay in the amount of six months of his base salary
and an amount equal to the bonus amounts earned and paid to Mr. Foliano for the two
quarters preceding his termination.
    
    Mr. Foliano was entitled to receive relocation and temporary living reimbursement.
    
    If within twelve months following a change of control involving Somera, Mr. Foliano
terminates his employment as a result of a constructive termination or Somera or
successor company terminates his employment for other than cause, death or disability,
then 25% of the shares subject to any unvested options granted to him shall immediately
vest and become exercisable at such time.
    
    Mr. Folianos right to receive the severance benefits listed above shall be conditioned
on his adhering to non-competition and non-solicitation provisions for the twelve-month
period following any termination of his employment with Somera.
 Termination of Certain Employment Arrangements in Fiscal 2005
 Jay Hilbert
  
    
    Mr. Hilbert was an at-will employee of Somera, serving in the role as Senior Vice President, Marketing and Sales.
    
    Mr. Hilberts annual base salary was $250,000.
    
    Mr. Hilbert was eligible to receive an annual bonus of up to $200,000 based upon the
performance of Mr. Hilberts marketing and sales organization, and eligible to participate
in Someras operating income bonus plan, up to an amount equal to $62,500, based upon
Someras performance and profitability.
    
    Mr. Hilbert received a stock option to purchase 375,000 shares of Someras common stock,
which option will vest as to 25% of the shares subject to the option one year after the
date of grant, and as to 1/48th of the shares subject to the option monthly
thereafter so that the option will be fully vested and exercisable four years from the date
of grant, subject to Mr. Hilberts continued service to Somera during such time period.
    
    If Mr. Hilberts employment terminated as a result of constructive termination or
other than voluntarily or for cause, (and he signs a standard release of claims), then he
would be entitled to receive severance pay in the amount of six months of his base salary.
    
    If within twelve months following a change of control involving Somera, Mr. Hilbert
terminates his employment as a result of a constructive termination or Somera or
successor company terminates his employment for other than cause, death or disability,
then 50% of the shares subject to any unvested options granted to him shall immediately
vest and become exercisable at such time.
    
    Mr. Hilberts right to receive the severance benefits listed above shall be conditioned
on his adhering to non-competition and non-solicitation provisions for the twelve-month
period following any termination of his employment with Somera.
 56




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##### Table of Contents



Scott Willis
  
    
    Mr. Willis was an at-will employee of Somera, serving in the role as Senior Vice President of Services.
    
    Mr. Willis annual base salary was $230,000.
    
    Mr. Willis was eligible to participate in Someras operating income bonus plan, up to an
amount equal to $115,000, based upon Someras performance and profitability.
    
    Mr. Willis received an additional stock option to purchase 275,000 shares of Someras
common stock, which option will vest as to 25% of the shares subject to the option one year
after the date of grant, and as to 1/48th of the shares subject to the option
monthly thereafter so that the option will be fully vested and exercisable four years from
the date of grant, subject to Mr. Williss continued service to Somera during such time
period.
    
    If Mr. Williss employment terminated as a result of constructive termination or other
than voluntarily or for cause, (and he signs a standard release of claims), then he would
be entitled to receive severance pay in the amount of six months of his base salary.
    
    If within twelve months following a change of control involving Somera, Mr. Willis
terminates his employment as a result of a constructive termination or Somera or
successor company terminates his employment for other than cause, death or disability,
then 50% of the shares subject to any unvested options granted to him shall immediately
vest and become exercisable at such time.
    
    Mr. Williss right to receive the severance benefits listed above shall be conditioned
on his adhering to non-competition and non-solicitation provisions for the twelve-month
period following any termination of his employment with Somera.
  Jeremy D. Rossen
  
    
    Mr. Rossen was an at-will employee of Somera, serving in the role as Vice President and General Counsel.
    
    Mr. Rossens annual base salary was $200,000.
    
    Mr. Rossen was eligible to participate in Someras operating income bonus plan, up to an
amount equal to $100,000, based upon Someras performance and profitability.
    
    Mr. Rossen received an additional stock option to purchase 125,000 shares of Someras
common stock, which option will vest as to 25% of the shares subject to the option one year
after the date of grant, and as to 1/48th of the shares subject to the option
monthly thereafter so that the option will be fully vested and exercisable four years from
the date of grant, subject to Mr. Rossens continued service to Somera during such time
period.
    
    If Mr. Rossens employment terminated as a result of constructive termination or other
than voluntarily or for cause, (and he signs a standard release of claims), then he would
be entitled to receive severance pay in the amount of six months of his base salary and an
amount equal to the bonus amounts earned and paid to Mr. Rossen for the two quarters
preceding his termination.
    
    If within twelve months following a change of control involving Somera, Mr. Rossen
terminates his employment as a result of a constructive termination or Somera or
successor company terminates his employment for other than cause, death or disability,
then 25% of the shares subject to any unvested options granted to him shall immediately
vest and become exercisable at such time.
    
    Mr. Rossens right to receive the severance benefits listed above shall be conditioned
on his adhering to non-competition and non-solicitation provisions for the twelve-month
period following any termination of his employment with Somera.
  Human Resources Committee
 57




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Report of the Human Resources Committee of the Board of Directors
   Compensation Philosophy
  Compensation Components
   Base Salary
 Variable Compensation
 Long-Term Compensation
 Chief Executive Officers Compensation
  
 
 58




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##### Table of Contents



STOCK PERFORMANCE GRAPH
 Stockholder Return Comparison
  Comparison of Cumulative Total Return Among Somera Communications, Inc.,
The NASDAQ Composite Index, and NASDAQ Telecommunications Index
 
 NASDAQ Composite
    
    NASDAQMeasurement Period
    
    Somera
    
    Index
    
    Telecommunications Index12/31/99
    
    100
    
    100
    
    1003/31/00
    
    98
    
    112
    
    1096/30/00
    
    109
    
    97
    
    869/30/00
    
    76
    
    90
    
    7212/31/00
    
    70
    
    61
    
    463/31/01
    
    36
    
    45
    
    326/30/01
    
    58
    
    53
    
    319/30/01
    
    35
    
    37
    
    2012/31/01
    
    61
    
    48
    
    233/31/02
    
    59
    
    45
    
    176/30/02
    
    57
    
    36
    
    109/30/02
    
    16
    
    29
    
    912/31/02
    
    22
    
    33
    
    113/31/03
    
    7
    
    33
    
    126/30/03
    
    12
    
    40
    
    149/30/03
    
    15
    
    44
    
    1512/31/03
    
    13
    
    49
    
    183/31/04
    
    12
    
    49
    
    186/30/04
    
    13
    
    50
    
    189/30/04
    
    11
    
    47
    
    1712/31/04
    
    10
    
    53
    
    2003/31/05
    
    13
    
    49
    
    1806/30/05
    
    13
    
    51
    
    1809/30/05
    
    8
    
    53
    
    1912/31/05
    
    6
    
    54
    
    18
 59




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  Beneficial Ownership of Voting Stock
  Number of Shares of
    
    Percentage ofCommon Stock
    
    CommonName and Address of
    
    Beneficially Owned
    
    Stock OutstandingBeneficial Owner
    
    (1)
    
    (2)5% StockholdersSummit Funds (3)
    
    
    12,082,333
    
    
    
    24.00
    %c/o Summit Partners
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301B. Riley Funds (4)
    
    
    4,879,953
    
    
    
    9.69
    %11100 Santa Monica Blvd., Suite 800
Los Angeles, CA 90025Gryphon Funds (5)
    
    
    4,408,805
    
    
    
    8.76
    %100 Crescent Court, Suite 490
Dallas, TX 75201Lloyd I. Miller, III (6)
    
    
    3,518,528
    
    
    
    6.99
    %4550 Gordon Drive
Naples, Fl 34102Saranac Capital Management (7)
    
    
    3,388,100
    
    
    
    6.73
    %31 West 52nd Street
New York, NY 10019FMR Corp. (8)
    
    
    2,560,015
    
    
    
    5.09
    %82 Devonshire Street
Boston, MA 02109Other Directors and Named Executive OfficersDavid W. Heard (9)
    
    
    541,666
    
    
    
    
    *Kent Coker (10)
    
    
    300,000
    
    
    
    
    *Michael Foliano (11)
    
    
    375,000
    
    
    
    
    *Jay Hilbert (12)
    
    
    375,000
    
    
    
    
    *Scott Willis (13)
    
    
    275,000
    
    
    
    
    *Jeremy D. Rossen (14)
    
    
    1
    
    
    
    
    *Walter G. Kortschak (15)
    
    
    7,188
    
    
    
    
    *c/o Summit Partners
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301Casimir S. Skrzypczak (16)
    
    
    52,708
    
    
    
    
    *David A. Young (17)
    
    
    52,708
    
    
    
    
    *Barry Phelps (18)
    
    
    172,814
    
    
    
    
    *Charles E. Levine (19)
    
    
    52,708
    
    
    
    
    *All directors and executive officers as a group (10 persons)(1)
    
    
    2,204,793
    
    
    
    4.38
    %
 
 *
    
    Less than 1%.(1)
    
    The inclusion herein of any shares of Common Stock deemed beneficially owned does not constitute an admission of beneficial
ownership of those shares. Unless otherwise indicated, to the knowledge of the Company based upon information provided by such
persons, each person listed above has sole voting and investment power (or shares such power with his or her spouse) with respect
to the shares listed. For purposes of this table, each person is deemed to beneficially own any shares subject to stock options,
warrants or other securities convertible into Common Stock, held by such person which are currently exercisable (or convertible)
within 60 days after March 1, 2006. Unless otherwise indicated, the address of each beneficial owner is c/o Somera Communications,
Inc., 301 S. Northpoint Drive, Coppell, Texas 75019.(2)
    
    As of March 1, 2006, on which date there were a total of 50,340,530 shares of Common Stock outstanding.(3)
    
    Includes 11,082,581 shares of Common Stock owned by Summit Ventures V, L.P., 635,075 shares of Common Stock owned
by Summit V Advisors Fund (QP), L.P., 194,075 shares of Common Stock owned by Summit V Advisors Fund, L.P. and
170,602 shares of Common Stock owned by Summit Investors III, L.P.(4)
    
    Includes 4,879,953 shares of Common Stock owned by B. Riley Co., Inc. and its affiliates, including Riley
Investment Management LLC and SACC Partners LP. 60




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##### Table of Contents



(5)
    
    Based on Schedule 13G filed with the SEC on February 14, 2006. The schedule discloses 4,408,805 shares of Common
Stock over which Gryphon Master Fund, L.P., Gryphon Partners, L.P., Gryphon Management Partners, L.P., Gryphon
Advisors, L.L.C. and E.B. Lyon, IV have shared voting and dispositive power.(6)
    
    Based on Schedule 13G filed with the SEC on February 2, 2006. Mr. Miller has sole dispositive power with respect
to 1,708,907 shares of Common Stock as the manager of a limited liability company that is the general partner of a
certain general partnership and shared dispositive power with respect to 1,809,621 shares of Common Stock as an
investment advisor to the trustee of a certain family trust and the trustee to a certain grantor retained annuity
trust.(7)
    
    Based on Schedule 13G filed with the SEC on February 14, 2006. The schedule discloses 3,388,100 shares of Common
Stock over which Mr. Ross Margolis may be deemed to have investment discretion over as the managing member of
Saranac Management GP LLC, which is the general partner of Saranac Capital Management LP.(8)
    
    Based on Schedule 13G filed with the SEC on February 14, 2006. The schedule discloses that FMR Corp, Fidelity
Research & Management Company and Fidelity Low Priced Stock Fund beneficially own 2,560,015 shares of Common
Stock.(9)
    
    Includes 541,666 shares issuable upon exercise of options that are exercisable within 60 days of March 1, 2006.(10)
    
    Includes 300,000 shares issuable upon exercise of options that are exercisable within 60 days of March 1, 2006.(11)
    
    Includes 325,000 shares issuable upon exercise of options that are exercisable within 60 days of March 1, 2006 and
37,500 shares which are subject to the Companys right of repurchase.(12)
    
    Includes 375,000 shares issuable upon exercise of options that are exercisable within 60 days of March 1, 2006.
Mr. Hilbert ceased to be employed by the Company as of January 24, 2006, but continues to provide the Company
consulting services and currently serves on the Companys Advisory Board.(13)
    
    Includes 275,000 shares issuable upon exercise of options that are exercisable within 60 days of March 1, 2006.
Mr. Willis ceased to be employed by the Company as of January 24, 2006, but continues to provide the Company
consulting services and currently serves on the Companys Advisory Board.(14)
    
    Mr. Rossens employment as Vice President and General Counsel of the Company terminated effective December 1, 2005.(15)
    
    Mr. Kortschak, one of our directors, is a member of Summit Partners, LLC, which is the general partner of Summit
Partners, V, which is the general partner of each of Summit Ventures V, Summit V Advisors Fund (QP), and Summit V
Advisors Fund. Mr. Kortschak is also a general partner of Summit Investors III. Summit Partners, LLC, through an
investment committee, has voting and dispositive power with respect to the shares owned by the Summit funds. Mr.
Kortschak does not have voting or dispositive power with respect to the shares owned by the Summit funds and
disclaims beneficial ownership of these shares. Includes 7,188 shares issuable upon exercise of options that are
exercisable within 60 days of March 1, 2006.(16)
    
    Includes 6,562 shares which are subject to the Companys right of repurchase. Also includes 37,708 shares issuable
upon exercise of options that are exercisable within 60 days of March 1, 2006.(17)
    
    Includes 6,562 shares which are subject to the Companys right of repurchase. Also includes 37,708 shares issuable
upon exercise of options that are exercisable within 60 days of March 1, 2006.(18)
    
    Includes 6,562 shares which are subject to the Companys right of repurchase. Also includes 157,500 shares
issuable upon exercise of options that are exercisable within 60 days of March 1, 2006. Also includes 314 shares
held by the Phelps Family Trust over which Mr. Phelps has voting and dispositive power.(19)
    
    Includes 6,562 shares which are subject to the Companys right of repurchase. Also includes 37,708 shares issuable
upon exercise of options that are exercisable within 60 days of March 1, 2006. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Executive
Compensation  Termination of Certain Employment Arrangements in Fiscal 2005.
 61




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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Fee Type
    
    2005
    
    
    2004Audit Fees(1)
    
    $
    1,117,250
    
    
    $
    1,320,799Audit related fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees(2)
    
    
    268,928
    
    
    
    Total(3)
    
    $
    1,368,178
    
    
    $
    1,320,799
 
 (1)
    
    Includes fees associated with the Companys compliance with Section 404 of the Sarbanes-Oxley Act of 2002.(2)
    
    All Other Fees in 2005 primarily relate to audit, analysis and due diligence associated with a
prospective acquisition the Company chose not to complete. The Audit Committee pre-approved the provision
by PricewaterhouseCoopers LLP of these other non-audit related services provided to the Company.(3)
    
    Actual amounts, which differ from estimated amounts in prior
reports.  Report of the Audit Committee of the Board of Directors
    Review with Management
  Review and Discussions with Independent Auditors
   
 
 62




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
      ExhibitNumber
    
    Exhibit Title3.1(a)
    
    Amended and Restated Certificate of Incorporation of Somera Communications, Inc., a Delaware corporation, as currently in effect.3.2(a)
    
    Bylaws of Somera Communications, Inc., as currently in effect.4.1(a)
    
    Specimen common stock certificate.10.1(a)
    
    Form of Indemnification Agreement between Somera Communications, Inc. and each of its directors and officers.10.2(a)
    
    1999 Stock Option Plan and form of agreements thereunder (as adopted September 3, 1999).10.3(a)
    
    1999 Employee Stock Purchase Plan (as adopted September 3, 1999).10.4(a)
    
    1999 Director Option Plan and form of agreements thereunder (as adopted September 3, 1999).10.6(b)
    
    Second Amendment to Sublease, dated January 31, 2001, between GRC International, Inc. and Somera Communications.10.7(a)
    
    Form of Registration Agreement, between Somera Communications, Inc., and certain of its stockholders.10.8(b)
    
    Lease, dated November 1, 2000 through October 31, 2005, between Somera Communications BV i.o. and Stena Realty BV.10.10(d)
    
    Lease Agreement, dated July 10, 2000, between Endicott Company, LLC and Somera Communications, Inc.10.11(e)
    
    First Amendment, dated January 28, 2003 and Original Lease Agreement, dated November 2, 2002, between Somera Communications,
Inc. and Amberpoint at Coppell LLC.10.12(e)
    
    Termination of Employment Agreement between Somera Communications, Inc. and Dan Firestone, dated March 10, 2003.10.13(f)
    
    Employment Agreement between Somera Communications, Inc. and Kerry Zan Moore, dated April 2, 2004.10.14(f)
    
    Executive Employment Agreement between Somera Communications, Inc. and Jeremy D. Rossen, dated April 2, 2004.10.15(f)
    
    Executive Employment Agreement between Somera Communications, Inc. and David Heard, dated April 20, 2004.10.16(g)
    
    Executive Employment Agreement between Somera Communications, Inc. and Michael Foliano, dated August 2, 2004.10.17(h)
    
    Transition Agreement between Somera Communications, Inc. and C. Stephen Cordial, dated September 14, 2004.10.18(i)
    
    Transition Agreement and General Release by and between Glenn OBrien and Somera Communications, Inc., dated November 8, 2004.10.19(j)
    
    Sublease Agreement by and between Somera Communications, Inc., QAD Inc. and The Wright Family C Limited Partnership for the premises
located at 6410 Via Real, Suite C & D, Carpenteria, California, dated as of December 2, 2004.10.20(k)
    
    Employment Agreement between Somera Communications Sales, Inc. and Jay Hilbert, dated February 16, 2005.10.21(l)
    
    Employment Agreement between Somera Communications Sales, Inc. and Kent Coker, dated March 2, 2005, as amended March 14, 2005.10.22(m)
    
    Employment Agreement between Somera Communications Sales, Inc. and Scott Willis dated May 31, 2005.10.23(n)
    
    Severance Agreement and Release of All Claims by and between Somera Communications, Inc. and Jeremy Rossen, dated November 15, 2005.10.24(o)
    
    1999 Stock Option Plan, as amended December 23, 2005.21.1
    
    List of Subsidiaries of Somera Communications, Inc.23.1
    
    Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm31.1
    
    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
 63




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title31.2
    
    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.32.1
    
    Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
  (a)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1, filed September 10, 1999, as amended (File No. 333-86927).(b)
    
    Incorporated by reference to the Companys Report on Form 10-K, filed on March 29, 2001.(d)
    
    Incorporated by reference to the Companys Report on Form 10-K, filed on March 18, 2002.(e)
    
    Incorporated by reference to the Companys Report on Form 10-Q, filed on May 15, 2003.(f)
    
    Incorporated by reference to the Companys Report on Form 10-Q, filed on April 28, 2004(g)
    
    Incorporated by reference to the Companys Report on Form 10-Q, filed on August 9, 2004(h)
    
    Incorporated by reference to the Companys Report on Form 8-K, filed on September 16, 2004(i)
    
    Incorporated by reference to the Companys Report on Form 8-K, filed on November 8, 2004(j)
    
    Incorporated by reference to the Companys Report on Form 8-K, filed on December 8, 2004(k)
    
    Incorporated by reference to the Companys Report on Form 8-K, filed on February 17, 2005.(l)
    
    Incorporated by reference to the Companys Report on Form 8-K, filed on March 3, 2005.(m)
    
    Incorporated by reference to the Companys Report on Form 8-K filed on June 3, 2005.(n)
    
    Incorporated by reference to the Companys Report on Form 8-K filed on November 16, 2005(o)
    
    Incorporated by reference to the Companys Report on Form 8-K filed on December 30, 2005. 64




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##### Table of Contents



SIGNATURES
 st
 SOMERA COMMUNICATIONS, INC.By:
    /s/ David  W. Heard(David W. HeardPresident and Chief Executive Officer) POWER OF ATTORNEY
   Signature
    
    Title/s/ David W. Heard


(David W. Heard)
    
    President and Chief Executive Officer,
Director (Principal Executive Officer)/s/ Kent Coker

(Kent Coker)
    
    Chief Financial Officer and Corporate Secretary
(Principal Financial Officer)/s/ Barry Phelps

(Barry Phelps)
    
    Chairman of the Board/s/Walter G. Kortschak

(Walter G. Kortschak)
    
    Director/s/ Charles E. Levine

(Charles E. Levine)
    
    Director/s/ Casimir Skrzypczak

(Casimir Skrzypczak)
    
    Director/s/ David A. Young

(David A. Young)
    
    Director
 65




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Valuation and Qualifying Accounts and Reserves
 SCHEDULE II
 
 VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    
    
    
    
    End ofPeriod
    
    Expenses
    
    Deductions
    
    PeriodYear ended December 31, 2003Allowance for sales returns
    
    $
    0
    
    
    $
    351
    
    
    $
    0
    
    
    $
    351Allowance for warranty obligations
    
    
    990
    
    
    
    1,617
    
    
    
    1,692
    
    
    
    915Allowance for doubtful accounts
    
    
    692
    
    
    
    1,221
    
    
    
    970
    
    
    
    943Allowance for excess and obsolete inventory
    
    
    14,499
    
    
    
    6,615
    
    
    
    17,410
    
    
    
    3,704Income Tax Valuation Allowance
    
    
    0
    
    
    
    25,498
    
    
    
    0
    
    
    
    25,498Year ended December 31, 2004Allowance for sales returns
    
    $
    351
    
    
    $
    372
    
    
    $
    0
    
    
    $
    723Allowance for warranty obligations
    
    
    915
    
    
    
    2,132
    
    
    
    1,919
    
    
    
    1,128Allowance for doubtful accounts
    
    
    943
    
    
    
    568
    
    
    
    937
    
    
    
    574Allowance for excess and obsolete inventory
    
    
    3,704
    
    
    
    4,760
    
    
    
    2,871
    
    
    
    5,593Income Tax Valuation Allowance
    
    
    25,498
    
    
    
    9,147
    
    
    
    0
    
    
    
    34,645Year ended December 31, 2005Allowance for sales returns
    
    $
    723
    
    
    $
    202
    
    
    $
    470
    
    
    $
    455Allowance for warranty obligations
    
    
    1,128
    
    
    
    443
    
    
    
    1,093
    
    
    
    478Allowance for doubtful accounts
    
    
    574
    
    
    
    665
    
    
    
    796
    
    
    
    443Allowance for excess and obsolete inventory
    
    
    5,593
    
    
    
    2,394
    
    
    
    3,329
    
    
    
    4,658Income Tax Valuation Allowance
    
    
    34,645
    
    
    
    11,823
    
    
    
    0
    
    
    
    46,468
 66