Trimble Inc.
TRIMBLE NAVIGATION LTD /CA/ (Form: 10-Q, Received: 11/06/2006 06:09:38)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
[ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2006

OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________


Commission file number: 0- 18645

TRIMBLE NAVIGATION LIMITED
(Exact name of registrant as specified in its charter)

                              California                                 94-2802192
                             (State or other jurisdiction of           (I.R.S. Employer Identification Number)
                             incorporation or organization)


935 Stewart Drive, Sunnyvale, CA 94085
(Address of principal executive offices) (Zip Code)

Telephone Number (408) 481-8000
(Registrant's telephone number, including area code)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes   [ X ]         No   [ ]


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

Large Accelerated Filer   [ X ]         Accelerated Filer   [ ]       Non-accelerated Filer   [ ]
 
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   [ ]         No   [ X ]

As of November 1, 2006, there were 55,612,912 shares of Common Stock (no par value) outstanding.


Page 1






TRIMBLE NAVIGATION LIMITED
FORM 10-Q for the Quarter ended September 29, 2006
TABLE OF CONTENTS

     
PART I.
Financial Information
Page
     
ITEM 1.   
Financial Statements (Unaudited):
 
     
 
Condensed Consolidated Balance Sheets —
 
 
as of September 29, 2006 and December 30, 2005    
3
     
 
Condensed Consolidated Statements of Income —
 
 
for the Three and Nine Months Ended September 29, 2006 and September 30, 2005
4
     
 
Condensed Consolidated Statements of Cash Flows —
 
 
for the Nine Months Ended September 29, 2006 and September 30, 2005
5
     
 
Notes to Condensed Consolidated Financial Statements  
6
     
ITEM 2.   
Management's Discussion and Analysis of Financial Condition and Results of Operations  
18
     
ITEM 3.   
Quantitative and Qualitative Disclosures about Market Risk  
26
 
 
 
  ITEM 4.   
Controls and Procedures  
27  
     
PART II.
Other Information
 
     
ITEM 1.   
Legal Proceedings  
28
     
ITEM 1A.   
Risk Factors  
28
     
ITEM 6.   
Exhibits  
33
     
SIGNATURES  
34


Page 2


PART I - FINANCIAL INFORMATION
ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 29,
     
December 30,
 
   
 2006
     
2005
 
(In thousands)
 
(UNAUDITED)
     
(1)
 
               
ASSETS
             
Current assets :
             
Cash and cash equivalents
$
136,402
   
$
73,853
 
Accounts receivable, net
 
173,318
     
145,100
 
Other receivables
 
7,423
     
6,489
 
Inventories, net
 
114,875
     
107,851
 
Deferred income taxes
 
21,834
     
18,504
 
Other current assets
 
10,275
     
8,580
 
Total current assets
 
464,127
     
360,377
 
Property and equipment, net
 
47,389
     
42,664
 
Goodwill and other purchased intangible assets, net
 
373,155
     
313,456
 
Deferred income taxes
 
3,809
     
3,580
 
Other assets
 
24 ,556
     
23,011
 
Total non-current assets
 
448,909
     
382,711
 
Total assets
$
913,036
   
$
743,088
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
             
Current liabilities:
             
Current portion of long-term debt
$
290
   
$
216
 
Accounts payable
 
40,529
     
45,206
 
Accrued compensation and benefits
 
39,387
     
36,083
 
Accrued liabilities
 
22,398
     
16,189
 
Deferred revenue
 
24,302
     
12,588
 
Accrued warranty expense
 
7,737
     
7,466
 
Deferred income taxes
 
5,462
     
4,087
 
Income taxes payable
 
21,977
     
24,922
 
Total current liabilities
 
162,082
     
146,757
 
Non-current portion of long-term debt
 
467
     
433
 
Deferred income tax
 
14,031
     
5,602
 
Other non-current liabilities
 
27,532
     
19,041
 
Total liabilities
 
204,112
     
171,833
 
               
Shareholders' equity:
             
Preferred stock no par value; 3,000 shares authorized; none outstanding
         
--
 
Common stock, no par value; 90,000 shares authorized;
55,558 and 53,910 shares issued and outstanding at September 29, 2006 and December 30, 2005, respectively
 
428,730
     
384,196
 
Retained earnings
 
247,199
     
167,525
 
Accumulated other comprehensive income
 
32,995
     
19,534
 
Total shareholders' equity
 
708,924
     
571,255
 
Total liabilities and shareholders' equity
$
913,036
   
$
743,088
 
(1)  
Derived from the December 30, 2005 audited Consolidated Financial Statements included in the Annual Report on Form 10-K of Trimble Navigation Limited for fiscal year 2005.
See accompanying Notes to the Condensed Consolidated Financial Statements.
 
Page 3


TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 
Three Months Ended
   
Nine Months Ended
   
September 29,
     
September 30,
     
September 29,
     
September 30,
 
   
2006
     
2005
     
2006
     
2005
 
(In thousands, except per share data)
                             
                               
Revenue (1)
$
234,851
   
$
188,484 
   
$
706,030
   
$
588,092 
 
Cost of sales (1)
 
118,660
     
91,192 
     
360,721
     
290,586 
 
Gross margin
 
116,191
     
97,292 
     
345,309
     
297,506 
 
                               
Operating expenses
                             
Research and development
 
25,180
     
20,639 
     
77,234
     
63,332 
 
Sales and marketing
 
34,902
     
29,313 
     
103,356
     
88,388 
 
General and administrative
 
17,981
     
13,448 
     
50,016
     
38,204 
 
Restructuring charges
 
-
     
     
-
     
278 
 
In-process research and development
 
50
     
     
1 000
     
 
Amortization of purchased intangible assets
 
1,747
     
865 
     
5,639
     
5,340 
 
Total operating expenses
 
79 860
     
64,265 
     
237 245
     
195,542 
 
Operating income
 
36,331
     
33,027 
     
108,064
     
101,964 
 
Non-operating income (expense), net
                 
 
         
Interest income (expense), net
 
1,315
     
(650) 
     
2,347
     
(1,680)
 
Foreign currency transaction gain, net
 
67
     
61 
     
995
     
67 
 
Income (expense) for affiliated operations, net
 
1,047
     
(1,976) 
     
4,238
     
(7,514) 
 
Other income, net
 
228
     
119 
     
409
     
287 
 
Total non-operating income (expense), net
 
2,657
     
(2,446) 
     
7,989
     
(8,840) 
 
Income before taxes
 
38,988
     
30,581 
     
116,053
     
93,124 
 
Income tax provision
 
13,646
     
10,345 
     
36,380
     
31,662 
 
Net income
$
25,342
   
$
20,236 
   
$
79,673
   
$
61,462 
 
                               
Basic earnings per share
$
0.46
   
$
0.38 
   
$
1.45
   
$
1.16 
 
Shares used in calculating basic earnings per share
 
55,339
     
53,592 
     
54,809
     
53,017 
 
                               
Diluted earnings per share
$
0.43
   
$
0.35 
   
$
1.38
   
$
1.08 
 
Shares used in calculating diluted earnings per share
 
58,493
     
57,492 
     
57,927
     
56,997 
 


(1) Sales to related parties were $5.2 million and $2.3 million for the three month period ended September 29, 2006 and September 30, 2005, respectively, while cost of sales to those related parties were $3.5 million and $ 1.1 million for the comparable periods. Sales to related parties were $15.6 million and $6.9 million for the nine month period ended September 29, 2006 and September 30, 2005, respectively, while cost of sales to those related parties were $9.7 million and $3.0 million for the comparable periods.
 
See accompanying Notes to the Condensed Consolidated Financial Statements.

Page 4


TRIMBLE NAVIGATION LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
   
  Nine Months Ended
 
     
September 29, 
     
September 30, 
 
   
 
2006
 
 
 
2005
 
(In thousands)
               
                 
Cash flow from operating activities:
               
Net income
 
$
79,673 
   
$
61,462 
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation expense
   
9,939 
     
7,890 
 
Amortization expense
   
9,082 
     
5,459 
 
Provision for doubtful accounts
   
181 
     
(663)  
 
Amortization of debt issuance cost
   
135 
     
1,225 
 
Deferred income taxes
   
(355)
     
8,410 
 
Stock-based compensation
   
9,437 
   
  
-   
 
In-process research and development
   
1,000 
     
 
Excess tax benefit for stock-based compensation
   
(8,088)
     
 
Other
   
131 
     
(670)
 
Add decrease (increase) in assets:
               
Accounts receivable, net
   
(19,829)
     
(22,673)
 
Other receivables
   
(623)
     
1,907 
 
Inventories
   
(3,442)
     
(4,926)  
 
Other current and non-current assets
   
(7,127)
     
(4,450)  
 
Add increase (decrease) in liabilities:
               
Accounts payable
   
(6,250)
     
(4,374)  
 
Accrued compensation and benefits
   
2,188 
     
825 
 
Accrued liabilities
   
2,734 
     
124 
 
Deferred gain on joint venture
   
     
5,523 
 
Deferred revenue
   
9,499 
     
1,677 
 
Income taxes payable
   
7,482 
     
12,850 
 
Net cash provided by operating activities
 
 
85,767
 
 
 
69,596 
 
                 
Cash flow from investing activities:
               
Acquisitions, net of cash acquired
   
(43,167)
     
(21,589)  
 
Acquisition of property and equipment
   
(13,966)
     
(14,400)  
 
    Dividends received
   
     
515   
  
Costs of capitalized patents
 
 
(16)
 
 
 
(94)  
  
Net cash used in investing activities
 
 
(57,149)
 
 
 
(35,568)  
 
                    
Cash flow from financing activities:
               
Issuance of common stock
   
24,134 
     
20,881 
 
Excess tax benefit for stock-based compensation
   
8,088 
     
390 
 
Proceeds from long-term debt and revolving credit lines
   
     
6,000 
 
Payments on long-term debt and revolving credit lines
   
-  
     
 (44,250)  
 
Other
   
(911)
     
-
 
Net cash provided (used) in financing activities
 
 
31,311 
 
 
 
(16,979)
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
2,620
     
(1,628)  
 
                 
Net increase in cash and cash equivalents
   
62,549 
     
15,421 
 
Cash and cash equivalents, beginning of period
   
73,853 
     
71,872 
 
Cash and cash equivalents, end of period
 
$
136,402 
 
 
$
87,293 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.

Page 5


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTE 1. OVERVIEW AND BASIS OF PRESENTATION

Trimble Navigation Limited (“we,” “Trimble” or the “Company”), incorporated in California in 1981, provides positioning product solutions to commercial and government users in a large number of markets. These markets include surveying, construction, agriculture, urban and resource management, military, transportation and telecommunications.

Trimble has a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2005 was December 30. The third fiscal quarters of 2006 and 2005 ended on September 29, 2006 and September 30, 2005, respectively. Fiscal 2006 and 2005 are 52-week years. Unless otherwise stated, all dates refer to its fiscal year and fiscal periods.

The Condensed Consolidated Financial Statements include the results of Trimble and its subsidiaries. Inter-company accounts and transactions have been eliminated. Certain amounts from prior periods have been reclassified to conform to the current period presentation.
 
The accompanying financial data as of September 29, 2006 and for the three and nine months ended September 29, 2006 and September 30, 2005 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with Trimble’s 2005 Annual Report on Form 10-K.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of financial position as of September 29, 2006, results of operations for the three and nine months ended September 29, 2006 and September 30, 2005 and cash flows for the nine months ended September 29, 2006 and September 30, 2005, as applicable, have been made. The results of operations for the three and nine months ended September 29, 2006 are not necessarily indicative of the operating results for the full fiscal year or any future periods. Individual segment revenues may be affected by seasonal buying patterns. Typically the second fiscal quarter has been the strongest quarter for the Company driven by the construction buying season. The second quarter has averaged 27% of total revenue in the last two fiscal years.
 
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)." SFAS 158 requires companies to recognize the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income, effective for fiscal years ending after December 15, 2006. For Trimble, this provision of SFAS 158 will be effective for the fiscal year ended 2006. SFAS 158 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, with limited exceptions, effective for fiscal years ending after December 15, 2008. For Trimble, this provision of SFAS 158 will be effective for the fiscal year ended 2008.   The Company is currently evaluating SFAS 158 and its possible impacts on the Company’s financial statements.  

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, “Accounting for Income Taxes.”  Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits.    FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  For Trimble, FIN 48 will be effective for the first quarter of fiscal 2007.  Differences between the amounts recognized in the statements of operations prior to and after the adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings.    The Company is currently evaluating FIN 48 and its possible impacts on the Company’s financial statements.   Upon adoption, there is a possibility that the cumulative effect would result in a charge or benefit to the beginning balance of retained earnings.

Page 6

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Standard of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS 123.

Trimble has adopted SFAS 123(R) using the modified prospective method which requires the adoption of the accounting standard for fiscal years beginning after June 15, 2005. As a result, the Company’s financial statements for fiscal periods after December 30, 2005 include stock-based compensation expenses that are not comparable to financial statements of fiscal periods prior to December 30, 2005. SFAS 123(R) requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the related employees’ requisite service periods in the Company’s Condensed Consolidated Statements of Income. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based compensation to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Condensed Consolidated Statement of Income because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant. See Note 3 to the Notes to the Condensed Consolidated Financial Statements for additional information.


NOTE 3. STOCK-BASED COMPENSATION

In accordance with the provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), "Accounting for Stock-Based Compensation" and “Statement of Financial Accounting Standards No. 148” (“SFAS 148”), “Accounting for Stock-Based Compensation - Transition and Disclosure,” Trimble applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (“APB 25”) and related interpretations in accounting for its stock option plans and stock purchase plan prior to fiscal 2006. Accordingly, Trimble did not recognize compensation cost for stock-based compensation prior to fiscal 2006. For periods subsequent to fiscal 2005, Trimble recognized expense related to stock-based compensation in accordance with SFAS 123(R)

The following table summarizes stock-based compensation expense, net of tax, related to employee stock-based compensation included in the Condensed Consolidated Statements of Income in accordance with SFAS 123(R) for the three and nine months ended September 29, 2006 and September 30, 2005 .
 

   
Three Months Ended
 
Nine Months Ended
     
September 29,
 
September 30,
 
September 29,
 
September 30,
 
     
2006
 
2005
 
2006
 
2005
 
(in thousands)
                   
                     
Cost of sales
 
$
285 
$
-
$
881 
 
-
 
                     
Research & development
   
620 
 
-
 
1,926 
 
-
 
Sales & marketing
   
663 
 
-
 
2,115 
 
-
 
General & administrative
   
1,380 
 
-
 
4,515 
 
-
 
Stock-based compensation expense included in operating expenses
   
2,663 
 
-
 
8,556 
 
-
 
                     
Total stock-based compensation
   
2,948 
 
-
 
9,437 
 
-
 
Tax benefit
(1)
 
(263)
 
-
 
(851)
 
-
 
Total stock-based compensation, net of tax
 
$
2,685 
$
-
$
8,586 
 
-
 

(1) Tax benefit related to non-qualified options only as allowed by the applicable tax requirements using the statutory tax rate as of the three and nine months ended September 29, 2006.

The table below provides pro forma information for the three and nine months ended September 30, 2005 as if Trimble had accounted for its employee stock options and purchases under the employee stock purchase plan in accordance with SFAS 123.

Page 7


 
Three Months Ended
Nine Months Ended
   
September 30,
   
September 30,
 
   
2005
   
2005
 
(in thousands, except per share amounts)
           
             
Net income - as reported
$
20,236
 
$
61,462
 
Stock-based compensation expense, net of tax (2)
 
2,640
   
8,448
 
Net income - pro forma
$
17,596
 
$
53,014
 
             
Basic earnings per share - as reported
$
0.38
 
$
1.16
 
Basic earnings per share - pro forma
$
0.33
 
$
1.00
 
             
Diluted earnings per share - as reported
$
0.35
 
$
1.08
 
Diluted earnings per share - pro forma
$
0.31
 
$
0.93
 

(2) Includes compensation expense for employee stock purchase plan for the three and nine months ended September 30, 2005 and reduction of tax benefits for stock-based compensation other than non-qualified stock options which were not included in the pro forma disclosure of Trimble’s third quarter of fiscal 2005 Form 10-Q. Tax benefit relates to non-qualified options only as allowed by the applicable tax requirements using the statutory tax rate as of the third quarter of fiscal 2005.


OPTIONS

Stock option expense recognized during the period is based on the value of the portion of share-based payment awards that is expected to vest during the period. Stock option expense recognized in the Company’s Condensed Consolidated of Income for the three and nine months ended September 29, 2006 included compensation expense for stock options granted prior to, but not yet vested as of December 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123 and compensation expense for the stock options granted subsequent to December 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company changed its method of attributing the value of stock option to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all stock options granted on or prior to December 30, 2005 will continue to be recognized using the accelerated multiple-option approach while compensation expense for all stock options granted subsequent to December 30, 2005 is recognized using the straight-line single-option method. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

Stock Option Plans

Trimble issues new shares upon exercises of stock options related to the following plans.

2002 Stock Plan

In 2002, Trimble’s Board of Directors adopted the 2002 Stock Plan (“2002 Plan”). The 2002 Plan, as amended to date and approved by shareholders, provides for the granting of incentive and non-statutory stock options for up to 6,000,000 shares plus any shares currently reserved but unissued to employees, consultants, and directors of Trimble. Incentive stock options may be granted at exercise prices that are not less than 100% of the fair market value of Common Stock on the date of grant. Employee stock options granted under the 2002 Plan have 120-month terms, and vest at a rate of 20% at the first anniversary of grant, and monthly thereafter at an annual rate of 20%, with full vesting occurring at the fifth anniversary of the grant. The exercise price of non-statutory stock options issued under the 2002 Plan must be at least 85% of the fair market value of Common Stock on the date of grant.

1993 Stock Option Plan    

In 1992, Trimble's Board of Directors adopted the 1993 Stock Option Plan (“1993 Plan”). The 1993 Plan, as amended to date and approved by shareholders, provided for the granting of incentive and non-statutory stock options for up to 9,562,500 shares of Common Stock to employees, consultants, and directors of Trimble. Incentive stock options may be granted at exercise prices that are not less than 100% of the fair market value of Common Stock on the date of grant. Employee stock options granted under the 1993 Plan have 120-month terms, and vest at a rate of 20% at the first anniversary of grant, and monthly thereafter at an annual rate of 20%, with full vesting occurring at the fifth anniversary of grant. The exercise price of non-statutory stock options issued under the 1993 Plan must be at least 85% of the fair market value of Common Stock on the date of grant.

1992 Management Discount Stock Option Plan  

In 1992, Trimble's Board of Directors and shareholders approved the 1992 Management Discount Stock Option Plan ("Discount Plan"). Employee stock options granted under the 1992 Plan have 120-month terms, and vest at a rate of 20% at the first anniversary of grant, and monthly thereafter at an annual rate of 20%, with full vesting occurring at the fifth anniversary of the grant.

Page 8

1990 Director Stock Option Plan  

In December 1990, Trimble adopted a Director Stock Option Plan under which an aggregate of 570,000 shares of Common Stock have been reserved for issuance to non-employee directors as approved by the shareholders to date. Stock options issued under this plan vest generally over a three year period.


Option Activity

Activity during the first nine months of fiscal 2006 under the combined plans was as follows:


 
September 29, 2006
Nine Months Ended
Options
Weighted average exercise price
(In thousands, except for per share data)
   
     
Outstanding at December 30, 2005
6,414 
$ 18.70
Granted
159 
40.93
Exercised
(1,384)
13.94
Forfeited/Cancelled/Expired
(78)
25.03
Outstanding at September 29, 2006
5,109 
20.58


Options Outstanding and Exercisable

Exercise prices for options outstanding and exercisable as of September 29, 2006, ranged from $5.33 to $48.11. Options outstanding and exercisable consist of fully vested options and options expected to vest at September 29, 2006. The aggregate intrinsic value is the total pretax intrinsic value based on the Company’s closing stock price of $47.08 as of September 29 , 2006, which would have been received by the option holders had all option holders exercised their options as of that date.

     
Weighted-
 
Weighted-
   
     
Average
 
Average
 
Aggregate
 
Number
 
Exercise Price
 
Remaining
 
Intrinsic
 
Of Shares
 
per Share
 
Contractual Term
 
Value
       
 
( in years )
 
(in thousands)
Options Outstanding and Expected to Vest
4,991,648
 
$ 20.36
 
5.6
 
$ 133,406
Options Exercisable
3,014,052
 
15.62
 
5.0
 
94,824

As of September 29, 2006, the total unamortized stock option expense is $14.5 million with weighted-average recognition period of 1.4 years.

Valuation Assumptions

For options granted prior to October 1, 2005, the fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model. For stock options granted on or after October 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. In addition,   the binomial model incorporates actual option-pricing behavior and changes in volatility over the option’s contractual term. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated using the Black-Scholes model.

Under the binomial models and Black-Scholes, the estimated values of each employee stock option granted during the third quarter of fiscal 2006 and 2005 were $18.10 and $18.72 per share, respectively. The value of each option grant is estimated on the date of grant using the binomial model for options granted during the third quarter of fiscal 2006 and the Black-Scholes option pricing model for options granted during the third quarter of fiscal 2005 and with the following assumptions:
 
Page 9


 
 
 
Three Months Ended
 
Nine Months Ended
September 29,
2006
September 30, 2005
 
September 29,
2006
September 30, 2005
Expected dividend yield
--
--
 
--
--
Expected stock price volatility
42.7%
56.2%
 
42.2%
52.0%
Risk free interest rate
  5.1%
  4.2%
 
  4.7%
   4.1%
Expected life of options (in years)
 4.7  
 4.7  
 
4.6
4.7

Expected Dividend Yield - The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Expected Stock Price Volatility - The Company’s computation of expected volatility is based on a combination of implied volatilities from traded options on the Company’s stock and historical volatility. The Company used implied and historical volatility as the combination was more representative of future stock price trends than historical volatility alone.

Expected Risk Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

Expected Life Of Option - The Company’s expected term represents the period that the Company’s stock options are expected to be outstanding and was determined based on historical experience of similar stock options with consideration to the contractual terms of the stock options, vesting schedules and expectations of future employee behavior.


EMPLOYEE STOCK PURCHASE PLAN

Stock-based compensation expense related to the Company’s employee stock purchase plan is recognized during the purchase vesting period.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“Purchase Plan”) under which an aggregate of 5,775,000 shares of Common Stock have been reserved for sale to eligible employees as approved by the shareholders to date. The plan permits full-time employees to purchase Common Stock through payroll deductions at 85% of the lower of the fair market value of the Common Stock at the beginning or at the end of each offering period. The Purchase Plan terminates on September 8, 2008.

Valuation Assumptions

The fair value of rights granted under the Employee Stock Purchase Plan is estimated at the date of grant using the Black-Scholes option-pricing model. The following assumptions were used at September 29, 2006 and September 30, 2005:

 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2006
September 30, 2005
 
September 29,
2006
September 30, 2005
Expected dividend yield
--
--
 
--
--
Expected stock price volatility
36.1%
35.0%
 
40.0%
50.1%
Risk free interest rate
5.3%
3.5%
 
5.0%
3.4%
Expected life of purchase
0.7   
0.5   
 
0.6   
0.5   

Expected Dividend Yield - The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Expected Stock Price Volatility - The Company’s computation of expected volatility is based on implied volatilities from traded options on the Company’s stock. The Company used implied volatility because it is representative of future stock price trends during the six month purchase period.

Expected Risk Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the purchase period.

Expected Life Of Purchase - The Company’s expected life of the purchase is based on the term of the offering period of the purchase plan.

 

NOTE 4. JOINT VENTURES:

Caterpillar Trimble Control Technologies Joint Venture

On April 1, 2002, Caterpillar Trimble Control Technologies LLC (“CTCT”), a joint venture formed by Trimble and Caterpillar began operations. The joint venture is 50% owned by Trimble and 50% owned by Caterpillar, with equal voting rights. The joint venture is accounted for under the equity method of accounting. Under the equity method, Trimble’s share of profits and losses are included in income (expense) for affiliated operations, net in the non-operating income (expense), net section of the Condensed Consolidated Statements of Income. CTCT develops advanced electronic guidance and control products for earth moving machines in the construction and mining industries.

Page 10

Trimble acts as a contract manufacturer for CTCT. Products are manufactured based on orders received from CTCT and are sold at cost plus a mark up to CTCT. CTCT resells products to both Caterpillar and Trimble for sales through their respective distribution channels. Generally, Trimble sells products to its after market dealer channel, and Caterpillar sells products for factory and dealer installation. CTCT does not hold inventory in that the resale of products to Caterpillar and Trimble occur simultaneously when the products are purchased from Trimble.

Beginning in the first fiscal quarter of 2006, Trimble included the impact of certain transactions with CTCT in revenue and cost of sales. Revenue and cost of sales were recorded for the manufacturing of products that are sold to CTCT and then sold through the Caterpillar distribution channel. Cost of sales transactions also include the purchasing of products from CTCT at a higher price than Trimble's original manufacturing costs for products sold through the Trimble distribution channel. Prior to the first fiscal quarter of 2006, these transactions were included in income (expense) for affiliated operations, net in the non-operating income (expense), net section of the Consolidated Statements of Income. The change in presentation resulted from the Company’s assessment of CTCT’s advancement and ability to function as a stand-alone company. In addition, the Company’s exclusive manufacturing agreement with CTCT ended during fiscal 2005. As a result, during the first quarter of fiscal 2006, the Company deemed transactions between CTCT and Trimble to be arms-length and concluded they should be presented similarly to other vendor and customer relationships. The impact of this change in presentation was a $4.7 million decrease and 15.1 million decrease in gross margins for the three and nine month periods ended September 29, 2006. There was no impact on net income.

Trimble received reimbursement of employee-related costs from CTCT for Trimble employees dedicated to CTCT or performing work for CTCT totaling $3.3 million and $2.1 million for the three months ended September 29, 2006 and September 30, 2005, respectively, and $10.2 million and $7.0 million for the nine months ended September 29, 2006 and September 30, 2005, respectively. The reimbursements were offset against operating expenses.

 
September 29,
September 30,
Three Months Ended
2006
2005
(In millions)
   
     
CTCT incremental pricing effects, net
$    -
2.6
Trimble's 50% share of CTCT's reported (gain) loss
   (0.8)
(0.5)
Total CTCT expense (income) for affiliated operations, net
$ (0.8)
$ 2.1  
     
     
 
September 29,
September 30,
Nine Months Ended
2006
2005
(In millions)
   
     
CTCT incremental pricing effects, net
$    -
8.7
Trimble's 50% share of CTCT's reported (gain) loss
   (3.8)
 (1.5)
Total CTCT expense (income) for affiliated operations, net
$ (3.8)
$7.2 
     

The net outstanding balance due from CTCT was $1.0 million at September 29, 2006 and $0.2 million at December 30, 2005 and is included in account receivables, net. As of September 29, 2006, dividends receivable from CTCT was $2.3 million and was included in other receivables.

Nikon-Trimble Joint Venture

On March 28, 2003, Trimble and Nikon Corporation entered into an agreement to form a joint venture in Japan, Nikon-Trimble Co., Ltd., as described in Trimble’s 2005 Annual Report on Form 10-K. Nikon-Trimble began operations in July, 2003 and is equally owned by Trimble and Nikon, with equal voting rights.
 
Nikon-Trimble is the distributor in Japan for Nikon and Trimble products. Trimble is the exclusive distributor outside of Japan for Nikon branded survey products. For products sold from Trimble to the Nikon-Trimble, revenue is recognized by Trimble on a sell-through basis from Nikon-Trimble to the end customer. Profits from these inter-company sales are eliminated.

The terms and conditions of the sales of products from Trimble to Nikon-Trimble are comparable with those of the standard distribution agreements which Trimble maintains with its dealer channel and margins earned are similar to those from third party dealers. Similarly, the purchases of product by Trimble from the Nikon-Trimble are made on terms comparable with the arrangements which Nikon maintained with its international distribution channel prior to the formation of the joint venture with Trimble.

Page 11

Trimble has adopted the equity method of accounting for its investment in Nikon-Trimble, with 50% share of profit or loss from this joint venture to be reported by Trimble in the non-operating income (expense), net section of the Condensed Consolidated Statement of Income under the heading of income (expense) for affiliated operations, net. For both the three months ended September 29, 2006 and September 30, 2005, Trimble reported a profit of $0.2 million. For the nine months ended September 29, 2006 and September 30, 2005, Trimble reported a profit of approximately $0.4 million and a loss of $0.3 million, respectively, as its proportionate share of the results of the joint venture.  In the second quarter of fiscal 2006, Trimble began recording its proportionate share of profit or loss in the joint venture one month in arrears.  The impact of this change is not material. At September 29, 2006, the net payable from Trimble to Nikon-Trimble, related to the purchase and sale of products from and to Nikon-Trimble, is $1.3 million and is recorded within accounts payable, net on the Condensed Consolidated Balance Sheet.  At December 30, 2005, the net payable by Trimble to Nikon-Trimble is $2.0 million and is recorded within accounts payable on the Condensed Consolidated Balance Sheets. The carrying amount of the investment in Nikon Trimble was approximately $13.1 million at September 29, 2006 and $12.9 million at December 30, 2005 and is recorded in other non-current assets on the Condensed Consolidated Balance Sheets. 

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Intangible Assets
 
Intangible Assets consisted of the following:

   
September 29,
 
December 30,
As of
 
 2006
 
2005
(in thousands)
       
         
Intangible assets:
       
Intangible assets with definite life:
       
Existing technology
$
70,928  
$
48,100  
Trade names, trademarks, patents, and other intellectual properties
 
28,099  
 
26,808  
Total intangible assets with definite life
 
99,027  
 
74,908  
Less accumulated amortization
 
(57,986)   
 
(47,598)   
Total net intangible assets
41,041 
$
27,310  

Goodwill

Goodwill, by reporting segment, consisted of the following:

   
September 29,
 
December 30,
As of
 
 2006
 
2005
(in thousands)
       
         
Engineering and Construction
$
258,772 
$
229,176 
Mobile Solutions
 
59,933 
 
44,118 
Advanced Devices
 
13,409 
 
12,852 
         
Total Goodwill
332,114 
$
286,146 


NOTE 6. CERTAIN BALANCE SHEET COMPONENTS

Inventories net consisted of the following:

 
September 29,
 
December 30,
As of
 2006
 
2005
(in thousands)
     
Raw materials
$ 60,546
 
$ 52,199
Work-in-process
7,699
 
7,249
Finished goods
46,630
 
48,403
 
$ 114,875
 
$ 107,851
 
Page 12

 
Property and equipment consisted of the following:

 
September 29,
 
December 30,
As of
 2006
 
2005
(in thousands)
     
       
Machinery and equipment
$ 76,922 
 
$ 72,273  
Furniture and fixtures
12,144 
 
10,110  
Leasehold improvements
12,684 
 
8,695  
Buildings
5,707 
 
5,707  
Land
1,231 
 
1,231  
 
108,688 
 
98,016  
Less accumulated depreciation
(61,299)
 
(55,352) 
 
$ 47,389 
 
$ 42,664  


NOTE 7. THE COMPANY AND SEGMENT INFORMATION

Trimble is a designer and distributor of positioning products and applications enabled by GPS, optical, laser, and wireless communications technology. The Company provides products for diverse applications in its targeted markets.

To achieve distribution, marketing, production, and technology advantages, the Company manages its operations in the following four segments:

·  
Engineering and Construction — Consists of products currently used by survey and construction professionals in the field for positioning, data collection, field computing, data management, and machine guidance and control. The applications served include surveying, road, runway, construction, site preparation and building construction.

·  
Field Solutions — Consists of products that provide solutions in a variety of agriculture and geographic information systems (GIS) applications. In agriculture these include precise land leveling and machine guidance systems. In GIS they include handheld devices and software that enable the collection of data on assets for a variety of governmental and private entities.

·  
Mobile Solutions — Consists of products that enable end users to monitor and manage their mobile assets by communicating location and activity-relevant information from the field to the office. Trimble offers a range of products that address a number of sectors of this market including truck fleets, security, and public safety vehicles.

·  
Advanced Devices — The various operations that comprise this segment were aggregated on the basis that no single operation accounted for more than 10% of Trimble’s total revenue, operating income and assets. This segment is comprised of the Component Technologies, Military and Advanced Systems, Applanix and Trimble Outdoors businesses.

Trimble evaluates each of its segment's performance and allocates resources based on segment operating income from operations before income taxes, and some corporate allocations. Trimble and each of its segments employ the same accounting policies.

In the first quarter of 2006, Trimble combined the operating results of the former Components Technologies and Portfolio Technologies segments and included the combined operating results in the Advanced Devices segment. The change in presentation was made in recognition of the small size of each of the businesses relative to the total company. The presentation of prior period’s segment operating results has been changed to conform to the Company’s current segment presentation.

The following table presents revenues, operating income (loss), and identifiable assets for the four segments. Operating income (loss) is net revenue less operating expenses, excluding general corporate expenses, amortization in-process research and development expenses, restructuring charges, non-operating income (expense), and income taxes. The identifiable assets that Trimble's Chief Operating Decision Maker views by segment are accounts receivable and inventory.
 
Page 13


   
Reporting Segments
 
     
Engineering and
 
Field
 
Mobile
 
Advanced
   
 
 
Construction
 
Solutions
 
Solutions
 
Devices
 
Total
(In thousands)
                   
                       
Three Months Ended September 29, 2006
               
 
External net revenues
 
$ 162,370
 
$ 29,236
 
$ 16,426 
 
$ 26,819
 
$ 234,851
 
Operating income before corporate allocations
 
38,337
 
5,634
 
1,125 
 
4,113
 
49,209
                     
Three Months Ended September 30, 2005
               
 
External net revenues
 
134,172
 
24,882
 
7,214 
 
22,216
 
188,484
 
Operating income (loss) before corporate allocations
 
34,360
 
3,962
 
(746)
 
2,916
 
40,492
                       
Nine Months Ended September 29, 2006
               
 
External net revenues
 
$ 477,145
 
$ 108,599
 
$ 43,884 
 
$ 76,402
 
$ 706,030
 
Operating income before corporate allocations
 
103,519
 
30,841
 
1,722 
 
8,679
 
144,761
                       
Nine Months Ended September 30, 2005
               
 
External net revenues
 
$ 395,465
 
$ 102,495
 
$ 21,051 
 
$ 69,081
 
$ 588,092
 
Operating income (loss) before corporate allocations
 
93,022
 
27,583
 
(3,261)
 
10,726
 
128,070
                       
As of September 29, 2006
                   
 
Accounts receivable (1)
 
$ 125,447
 
$ 21,875
 
$ 11,562 
 
$ 18,857
 
$ 177,641
 
Inventories
 
85,820
 
12,590
 
1,974 
 
14,491
 
114,875
                       
As of December 30, 2005
                   
 
Accounts receivable (1)
 
$ 105,980
 
$ 21,823
 
$ 10,789 
 
$ 14,033
 
$ 152,625
 
Inventories
 
80,590
 
11,790
 
1,983 
 
13,488
 
107,851

(1)  
As presented, accounts receivable represents trade receivables, gross, which are specified between segments.

The following are reconciliations corresponding to totals in the accompanying Condensed Consolidated Financial Statements:

 
Three Months Ended
 
Nine Months Ended
   
September 29,
     
September 30,
     
September 29,
     
September 30,
 
   
2006
     
2005
     
2006
     
2005
 
(In thousands)
                             
                               
Operating income:
                             
Total for reportable divisions  
$
49,209 
   
$
40,492 
   
$
144,761 
   
$
128,070 
 
Unallocated corporate expenses
 
(12,878)
     
(7,465)  
     
(36,697)
     
(26,106)  
 
Operating income
$
36,331 
   
$
33,027 
   
$
108,064 
   
$
101,964 
 

 
September 29,
 
December 30,
As of
2006
 
2005
(in thousands)
     
Assets:
     
Accounts receivable total for reporting segments
$ 177,641 
 
$ 152,625 
Unallocated (1)
(4,323)
 
(7,525)
Total
$ 173,318 
 
$ 145,100 

(1) Includes trade-related accruals, allowances, and cash received in advance that are not allocated by segment.

Page 14

The distribution of Trimble’s gross consolidated revenue by segment is summarized in the table below. Gross consolidated revenue includes external and internal sales. Total external consolidated revenue is reported net of eliminations of internal sales between segments.

 
Three Months Ended
 
Nine Months Ended
   
September 29,
 
September 30,
     
September 29,
 
September 30,
 
   
2006
 
2005
     
2006
 
2005
 
(In thousands)
                     
                       
Engineering and Construction
$
164,387 
$
135,378 
   
$
480,947 
$
399,075 
 
Field Solutions
 
29,236 
 
24,882 
     
108,599 
 
102,495 
 
Mobile Solutions
 
16,426 
 
7,214 
     
43,884 
 
21,051 
 
Advanced Devices
 
26,823 
 
22,215 
     
76,408 
 
69,135 
 
Total Gross Consolidated Revenue
$
236,872 
$
189,689 
    
$
709,838 
$
591,756 
 
Eliminations
 
(2,021)
 
(1,205)
   
 
(3,808)
 
(3,664)
 
Total External Consolidated Revenue
$
234,851 
$
188,484 
   
$
706,030 
$
588,092 
 


NOTE 8. LONG-TERM DEBT

Credit Facilities

On July 28, 2005, Trimble entered into a $200 million unsecured revolving credit agreement (“2005 Credit Facility”) with a syndicate of 10 banks with The Bank of Nova Scotia as the administrative agent. The 2005 Credit Facility replaced the Company’s $175 million secured 2003 Credit Facility. The funds available under the new 2005 Credit Facility may be used by the Company for general corporate purposes and up to $25 million of the 2005 Credit Facility may be used for letters of credit.
 
The Company may borrow funds under the 2005 Credit Facility in U.S. Dollars or in certain other currencies, and will bear interest, at the Company's option, at either: (i) a base rate, based on the administrative agent's prime rate, plus a margin of between 0% and 0.125%, depending on the Company's leverage ratio as of its most recently ended fiscal quarter, or (ii) a reserve-adjusted rate based on LIBOR, EURIBOR, STIBOR or other agreed-upon rate, depending on the currency borrowed, plus a margin of between 0.625% and 1.125%, depending on the Company's leverage ratio as of the most recently ended fiscal quarter. The Company's obligations under the 2005 Credit Facility are guaranteed by certain of the Company's domestic subsidiaries.
 
 
The 2005 Credit Facility contains customary affirmative, negative and financial covenants including, among other requirements, negative covenants that restrict the Company's ability to dispose of assets, create liens, incur indebtedness, repurchase stock, pay dividends, make acquisitions, make investments, enter into mergers and consolidations and make capital expenditures, and financial covenants that require the maintenance of leverage and fixed charge coverage ratios. The 2005 Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, material judgments, and events constituting a change of control. Upon the occurrence and during the continuance of an event of default, interest on the obligations will accrue at an increased rate and the lenders may accelerate the Company's obligations under the 2005 Credit Facility, however that acceleration will be automatic in the case of bankruptcy and insolvency events of default. Trimble incurs a commitment fee if the 2005 Credit Facility is not used. The commitment fee is not material to the Company’s results during all periods presented.
 
At September 29, 2006, the Company had a zero balance outstanding under the 2005 Credit Facility and was in compliance with all financial covenants.


Notes Payable

As of September 29, 2006, the Company had other notes payable totaling approximately $0.8 million consisting of government loans to foreign subsidiaries and loans assumed from acquisitions.

NOTE 9. PRODUCT WARRANTIES
 
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, technical support labor costs, and costs incurred by third parties performing work on Trimble's behalf. The products sold are generally covered by a warranty for periods ranging from 90 days to three years, and in some instances up to 5.5 years.
 
Page 15

 
While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required.
 
Changes in the Company’s product warranty liability during the three and nine months ended September 29, 2006 and September 1, 2005 are as follows:

 
Three Months Ended
 
Nine Months Ended
   
September 29,
     
September 30,
     
September 29,
     
September 30,
 
   
2006
     
2005
     
2006
     
2005
 
(In thousands)
                             
                               
Beginning balance
$
7,475 
   
$
7,192
   
$
7,466 
   
$
6,425
 
Warranty accrued
 
1,956 
     
1,527
     
5,213 
     
5,686
 
Warranty claims
 
(1,694)
     
(1,564)
     
(4,942)
     
(4,956)
 
Ending Balance
$
7,737 
   
$
7,155
   
$
7,737 
   
$
7,155
 

The product warranty liability is classified as accrued warranty in the accompanying condensed consolidated balance sheets.


NOTE 10. EARNINGS PER SHARE

The following data was used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive Common Stock.

   
Three Months Ended
 
Nine Months Ended
     
September 29,
     
September 30,
     
September 29,
     
September 30,
 
     
2006
     
2005
     
2006
     
2005
 
(In thousands, except per share amounts)
                               
                                 
Numerator:
                               
Income available to common shareholders:
                               
Used in basic and diluted earnings per share
 
$
25,342
   
$
20,236
   
$
79,673
   
$
61,462
 
                                 
Denominator:
                               
Weighted average number of common shares used in basic earnings per share
   
55,339
     
53,592
     
54,809
     
53,017
 
Effect of dilutive securities (using treasury stock method):
                               
Common stock options
   
2,495
     
2,948
     
2,573
     
3,100
 
Common stock warrants
   
659
     
952
     
545
     
800
 
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per share
   
58,493
     
57,492
     
57,927
     
56,997
 
                                 
Basic earnings per share
 
$
0.46
   
$
0.38
   
$
1.45
   
$
1.16
 
Diluted earnings per share
 
$
0.43
   
$
0.35
   
$
1.38
   
$
1.08
 

NOTE 11. RESTRUCTURING CHARGES

The Company did not record any restructuring charges during the third quarter of fiscal 2006 or fiscal 2005. Payments of $0.1 million were made during each of the respective three months ended September 29, 2006 and September 30, 2005. Payments of $0.3 million were made during each of the nine months ended September 29, 2006 and September 30, 2005, respectively, relating to previous restructuring plans.   As of September 29, 2006, the remaining restructuring accrual balance is $0.1 million which relates to the closure of one of Trimble’s sales offices and is expected to be paid over the next year. The restructuring accrual is included on the Condensed Consolidated Balance Sheets under the heading of accrued liabilities.

Page 16

NOTE 12. COMPREHENSIVE INCOME

The components of comprehensive income, net of related tax in the Condensed Consolidated Statement of Income are as follows:
 
 
Three Months Ended
 
Nine Months Ended
   
September 29,
     
September 30,
     
September 29,
     
September 30,
 
   
2006
     
2005
     
2006
     
2005
 
(In thousands)
                             
                               
Net income
$
25,342
   
$
20,236 
   
$
79,673
   
$
61,462  
 
Foreign currency translation adjustments
 
3,716
     
1,265 
     
13,455
     
(21,529)   
 
Net gain (loss) on hedging transactions
 
-
     
     
-
     
(106)   
 
Net unrealized gain (loss) on investments
 
20
     
(15)  
     
6
     
(22)   
 
Comprehensive income
$
29,078
 
 
$
21,488 
 
 
$
93,134
 
 
$
39,805  
 

The components of accumulated other comprehensive income, net of related tax in the Condensed Consolidated Balance Sheets are as follows:

 
September 29,
 
December 30,
As of
2006
 
2005
(In thousands)
     
       
Accumulated foreign currency translation adjustments
$ 32,959
 
$ 19,504
Accumulated net unrealized gain on investments
36
 
30
Total accumulated other comprehensive income
$ 32,995
 
$ 19,534


NOTE 13. LITIGATION

From time to time, the Company is involved in litigation arising out of the ordinary course of its business. There are no known claims or pending litigation expected to have a material effect on the Company’s overall financial position, results of operations, or liquidity.
 
Page 17


This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Actual results could differ materially from those indicated in the forward-looking statements due to a number of factors including, but not limited to, the risk factors discussed in “Risks and Uncertainties” below and elsewhere in this report as well as in the Company's Annual Report on Form 10-K for fiscal year 2005 and other reports and documents that the Company files from time to time with the Securities and Exchange Commission. The Company has attempted to identify forward-looking statements in this report by placing an asterisk (*) before paragraphs. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. In some cases, forward-looking statements can be identified by terminology such as “may,” ”will,” “should,” “could,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the Company disclaims any obligation to update these statements or to explain the reasons why actual results may differ.


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

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, doubtful accounts, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring costs, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the amount and timing of revenue and expenses and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See the discussion of our critical accounting policies under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for fiscal 2005.

RECENT BUSINESS DEVELOPMENTS

Meridian Project Systems, Inc.

On October 27, 2006, Trimble signed a definitive agreement to acquire privately-held Meridian Project Systems, Inc. of Folsom, Calif., in an all-cash transaction. Meridian Project Systems provides enterprise project management and lifecycle software for optimizing the plan, build and operate lifecycle for real estate, construction and other physical infrastructure projects. Building owners, construction contractors, engineering firms, and government agencies use Meridian's technology to reduce capital construction costs and improve project productivity.  Meridian’s performance will be reported under our Engineering and Construction business segment. The acquisition is expected to close in the fourth quarter of fiscal 2006.

XYZ Solutions, Inc.

On October 27, 2006, we acquired privately-held XYZ Solutions, Inc., of Alpharetta, Georgia, in an all-cash transaction. XYZ Solutions provides real-time, interactive 3D intelligence software to manage the spatial aspects of a construction project. XYZ Solutions’ performance will be reported under our Engineering and Construction business segment.

Visual Statement, Inc.

On October 11, 2006, we acquired privately-held Visual Statement, Inc. of Kamloops, British Columbia, Canada in an all-cash transaction. Visuals Statement provides state-of-the-art desktop software tools for crime and collision incident investigation, analysis, and reconstitution as well as state-wide enterprise solutions for reporting and analysis used by public safety agencies. Visual Statement’s performance will be reported under our Mobile Solutions business segment.

BitWyse Solutions, Inc.

On May 1, 2006, we acquired privately-held BitWyse Solutions, Inc. of Salem, Massachusetts in an all-cash transaction. BitWyse is a provider of engineering and construction information management software dedicated to providing engineering companies and owner operators a competitive advantage. BitWyse’s performance is reported under our Engineering and Construction business segment.

Eleven Technology, Inc.

On April 28, 2006, we acquired privately-held Eleven Technology, Inc. of Cambridge, Massachusetts in an all-cash transaction. Eleven is a mobile application software company with a leading position in the Consumer Packaged Goods industry. Eleven’s performance is reported under our Mobile Solutions business segment.
 
Page 18

Quantm International, Inc.

On April 5, 2006, we acquired privately-held Quantm International, Inc. a leading provider of transportation route optimization solutions used for planning highways, railways, pipelines and canals. Quantm’s innovative software system enables infrastructure planners to examine and select route corridors and alignments that simultaneously optimize construction costs, environmental restrictions, existing feature avoidance and legislative obligations. The improved solution for the proposed route may result in significant reductions to the customer in project planning time and cost. Quantm’s performance is reported under our Engineering and Construction business segment.

XYZ of GPS, Inc.

On February 26, 2006, we acquired the assets of XYZ of GPS, Inc. of Dickerson, Maryland. XYZ develops real-time Global Navigation Satellite System or, GNSS, reference station, integrity monitoring and dynamic positioning software for meter, decimeter and centimeter applications. The purchase of XYZ’s intellectual property is expected to extend our product portfolio of infrastructure solutions by providing software that enhances differential GNSS correction systems used in marine aides to navigation, surveying, civil engineering, hydrography, mapping and Geographic Information System or, GIS, and scientific applications. XYZ’s performance is reported under our Engineering and Construction business segment.

Advanced Public Safety, Inc.

On December 30, 2005, we acquired privately-held Advanced Public Safety, Inc. (“APS”) of Deerfield Beach, Florida. APS provides mobile and handheld software products used by law enforcement, fire-rescue and other public safety agencies. With the APS acquisition, we plan to leverage our rugged mobile computing devices and our fleet management systems to provide complete mobile resource solutions for the public safety industry. APS’s performance is reported under our Mobile Solutions business segment.

MobileTech Solutions, Inc.

On October 25, 2005, we acquired privately-held MobileTech Solutions, Inc. of Plano, Texas. MobileTech Solutions provides field workforce automation solutions and has a leading market position in the Direct Store Delivery market. We expect the MobileTech Solutions acquisition to extend our portfolio of fleet management and field workforce applications. MobileTech Solutions’ performance is reported under our Mobile Solutions business segment.

The effects of these acquisitions were not material to our overall results during all periods presented.


RESULTS OF OPERATIONS

Overview

The following table is a summary of revenue and operating income for the periods indicated and should be read in conjunction with the narrative descriptions below.

 
Three Months Ended
 
Nine Months Ended
 
September 29,
September 30,
 
September 29,
September 30,
 
2006
2005
 
2006
2005
(in thousands)
         
Total consolidated revenue
$ 234,851
188,484
 
$ 706,030
588,092
Gross margin
116,191
97,292
 
345,309
297,506
Gross margin %
49.5 %
51.6%
 
48.9%
50.6%
Total consolidated operating income
36,331
33,027
 
108,065
101,964
Operating income %
15.5%
17.5%
 
15.3%
17.3%

Revenue

In the three months ended September 29, 2006, total revenue increased by $46.4 million or 25%, as compared to the same corresponding period in fiscal 2005. The increase resulted from a strong revenue growth across all segments. Engineering and Construction revenue increased $28.2 million, Mobile Solutions increased $9.2 million, Field Solutions increased $4.3 million, and Advanced Devices increased $4.6 million, compared to the same corresponding period in fiscal 2005. Revenue growth within these segments was primarily driven by new product introductions and increased penetration of existing markets. Engineering and Construction and Mobile Solution segments also benefited from acquisitions.

Page 19

In the nine months ended September 30, 2006, total revenue increased by $117.9 million or 20%, as compared to the same corresponding period in fiscal 2005. The increase was primarily due to stronger performances in our Engineering and Construction and Mobile Solutions segments. The Engineering and Construction and Mobile Solutions segments increased $81.7 million and $22.8 million, respectively, compared to the same corresponding period in fiscal 2005. Revenue growth within these segments was primarily driven by new product introductions and increased penetration of existing markets, as well as the impact of acquisitions for the nine month period ended September 29, 2006 that were not applicable in the comparable period in 2005.

During the third fiscal quarter of fiscal 2006, sales to customers in the United States represented 54%, Europe represented 23%, Asia Pacific represented 12% and other regions represented 11% of our total revenues. During the same corresponding period in fiscal 2005, sales to customers in the United States represented 54%, Europe represented 25%, Asia Pacific represented 10% and other regions represented 11% of our total revenues.

* Our individual segment revenues may be affected by seasonal buying patterns. Typically the second fiscal quarter has been the strongest quarter for the Company driven by the construction buying season. The second quarter has averaged 27% of total revenue in the last two fiscal years.
   

Gross Margin

Gross margin varies due to a number of factors including product mix, pricing, distribution channel used, the effects of production volumes, new product start-up costs, and foreign currency translations. Gross margin as a percentage of total revenues was 49.5% and 48.9% for the three and nine months ended September 29, 2006, respectively, compared to 51.6% and 50.6% for the three and nine months ended September 30, 2005. Gross margin for the three months ended September 29, 2006 decreased primarily due to the impact of CTCT transactions of $4.7 million previously recorded in non-operating expenses, amortization of software-related purchased intangibles of $1.1 million and stock-based compensation expense of $0.3 million that were not included in gross margin during the third quarter of fiscal 2005, for a total impact of 3.0%. Gross margin for the nine months ended September 29, 2006 decreased primarily due to the impact of CTCT transactions of $15.1 million previously recorded in non-operating expenses, amortization of software-related purchased intangibles of $3.3 million and stock-based compensation expense of $0.9 million that were not included in gross margin during the same period in fiscal 2005, for a total impact of 2.7%. The decrease in the reported gross margin was driven by the above-mentioned discrete events.  This was offset by higher revenue and success of higher margin products, including some survey products, machine control products and higher subscription revenue.


Operating Income

Operating income as a percentage of total revenue was 15.5% and 17.5% for the third quarter of fiscal 2006 and 2005, respectively and 15.3% and 17.3% for the first nine months of fiscal 2006 and 2005, respectively. The decrease in operating margin for the three months ended September 29, 2006 compared to the corresponding period last year is driven by the impact of CTCT transactions of $4.7 million and stock-based compensation expense of $2.9 million that were not included in operating income during the third quarter of fiscal 2005. In addition, expenses related to acquisitions, namely amortization of purchased intangibles and purchased in-process research and development expenses, increased by $2.1 million versus the same period last year. The decrease in operating margin for the nine months ended September 29, 2006 is driven by the impact of CTCT transactions of $15.1 million and stock-based compensation expense of $9.4 million that were not included in operating income during the same period last year. In addition, expenses related to acquisitions, namely amortization of purchased intangibles and purchased in-process research and development expenses, increased by $4.6 million versus the same period last year. The decrease in operating margin for both three and nine month periods ended September 29, 2006 was driven by the above-mentioned discrete events.  This was offset by a strong operating leverage.


Results by Segment

To achieve distribution, marketing, production, and technology advantages in our targeted markets, we manage our operations in the following four segments: Engineering and Construction, Field Solutions, Mobile Solutions, and Advanced Devices. Operating income (loss) equals net revenue less cost of sales and operating expenses, excluding general corporate expenses, amortization of purchased intangibles, in-process research and development expenses, restructuring charges, non-operating income (expense), and income taxes.

In the first fiscal quarter of 2006, we combined the operating results of the former Components Technologies and Portfolio Technologies segments and included the combined operating results in the Advanced Devices segment. The change in presentation was made in recognition of the small size of each of the businesses relative to the total company. The presentation of prior period’s segment operating results has been changed to conform to our current segment presentation.

Page 20

The following table is a breakdown of revenue and operating income by segment (in thousands, except percentages):
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
September 30,
 
September 29,
September 30,
 
2006
2005
 
2006
2005
           
Engineering and Construction
         
Revenue
$162,370
$134,173
 
$477,145
$395,465
Segment revenue as a percent of total revenue
69%
71%
 
68%
67%
Operating income
$38,337
$34,360
 
$103,519
$93,022
Operating income as a percent of segment revenue
24%
26%
 
22%
24%
Field Solutions
         
Revenue
$29,236
$24,882
 
$108,598
$102,495
Segment revenue as a percent of total revenue
12%
15%
 
15%
17%
Operating income
$5,634
$ 3,962
 
$30,841
$27,583
Operating income as a percent of segment revenue
19%
16%
 
28%
27%
Mobile Solutions
         
Revenue
$16,426
$7,214
 
$43,884
$21,051
Revenue as a percent of total revenue
7%
4%
 
6%
4%
Operating income (loss)
$1,125
($746)
 
$1,722
($3,261)
Operating income (loss) as a percent of segment revenue
7%
(10%)
 
4%
(15%)
Advanced Devices
         
Revenue
$26,819
$22,216
 
$76,402
$69,081
Segment revenue as a percent of total revenue
12%
12%
 
11%
12%
Operating income
$4,113
$2,917
 
$8,679
$10,726
Operating income as a percent of segment revenue
15%
13%
 
11%
17%

A reconciliation of our consolidated segment operating income to consolidated income before income taxes follows:


 
Three Months Ended
 
Nine Months Ended
   
September 29,
     
September 30,
     
September 29,
     
September 30,
 
   
2006
     
2005
     
2006
     
2005
 
(In thousands)
                             
                               
Consolidated segment operating income
$
49,209 
   
$
40,492 
   
$
144,761 
   
$
128,070 
 
Unallocated corporate expense
 
(9,953)
     
(6,600)  
     
(26,742)
     
(20,488) 
 
Amortization of purchased intangible assets
 
(2,875)
     
(865)  
     
(8,955)
     
(5,340) 
 
In-process research and development expense
 
(50)
     
     
(1,000)
         
Restructuring charges
                         
(278) 
 
Non-operating income (expense), net
 
2,657 
     
(2,446)  
     
7,989 
     
(8,840) 
 
Consolidated income before income taxes
$
38,988 
   
$
30,581 
   
$
116,053 
   
$
93,124 
 


Engineering and Construction

Engineering and Construction revenues increased by $28.2 million or 21% and $81.7 million or 21% for the three and nine months ended September 29, 2006 compared to the same corresponding periods in fiscal 2005. Segment operating income increased by $4.0 million or 12% and $10.5 million or 11% for the three and nine months ended September 29, 2006 as compared to the same corresponding periods in fiscal 2005.

The revenue growth for both the three and nine months ended September 29, 2006 was driven by a steady market, strong sales of new products, aggressive marketing programs and geographic expansion. For the three months ended September 29, 2006, segment operating income increased as a result of the higher revenues and better product mix, partially offset by $4.7 million in expenses related to CTCT transactions and $0.9 million in stock-based compensation expense that were not present in the corresponding period of fiscal 2005. For the nine months ended September 29, 2006 segment operating income increased as a result of higher revenues and increased sales of higher margin products, partially offset by $15.1 million in expenses related to CTCT transactions, $3.0 million in stock-based compensation expense that were not present in the corresponding period of fiscal 2005 and higher costs incurred due to meeting the requirements of a European lead free initiative (known as RoHS).

Page 21

Field Solutions  

Field Solutions revenues increased by $4.4 million or 17% and $6.1 million or 6% for the three and nine months ended September 29, 2006
compared to the same corresponding periods in fiscal 2005. Segment operating income increased by $1.7 million or 42% and $3.3 million or 12% for the three and nine months ended September 29, 2006 as compared to the same corresponding periods in fiscal 2005.

Revenues increased for the three and nine months ended September 29, 2006 compared to the corresponding period of fiscal 2005 due to growth in both our agricultural and GIS businesses. In GIS, growth was due to new products and a continuing shift to a higher value, differentiated distribution channel. In agriculture, growth was driven by higher demand for both automated and manual guidance products as farmers increasingly utilized technology to increase yields and improve productivity. In addition, we benefited from the introduction of our new flow control products that extend our already strong position in this market. Operating income increased primarily due to strong operating leverage and new product introduction, partially offset by the inclusion of stock-based compensation that was not present in the corresponding periods of fiscal 2005.
 
Mobile Solutions  

Mobile Solutions revenues increased by $9.2 million or 128% and $22.8 million or 108% for the three and nine months ended September 29, 2006 compared to the same corresponding periods in fiscal 2005. Segment operating income increased by $1.9 million or 251% and $5.0 million or 153% for the three and nine months ended September 29, 2006 as compared to the same corresponding periods in fiscal 2005.

Revenues for the three and nine months ended September 29, 2006 compared to the corresponding periods of fiscal 2005 grew due to increased subscriber growth, an increase in recurring revenues, the benefit of acquisitions not in the prior period, and our entry into new vertical markets. Operating income increased for three and nine months ended September 29, 2006 compared to the corresponding periods of fiscal 2005 primarily due to higher subscription revenue and gross margins, partially offset by the inclusion of stock-based compensation that was not present in the corresponding periods of fiscal 2005.

Advanced Devices

Advanced Devices revenues increased by $4.6 million or 21% and $7.2 million or 10% for the three and nine months ended September 29, 2006 compared to the same corresponding periods in fiscal 2005. Segment operating income increased by $1.2 million or 41% and decreased by $2.0 million or 19% for the three and nine months ended September 29, 2006 as compared to the corresponding period in fiscal 2005.

For the three and nine months ended September 29, 2006 compared to the corresponding periods in fiscal 2005, the increase in revenue was primarily due to stronger performance in our Applanix business, a new intellectual property licensing agreement with Nokia Corporation signed in the third quarter of fiscal 2006 and an increase of component sales to our non-automotive Original Equipment Manufacturers (“OEM’s”). Operating income for the three months ended September 29, 2006 increased compared to the same period in fiscal 2005 due to stronger Applanix and intellectual property licensing revenue, partially offset by increased development cost related to the TrimTrac® GSM version and the inclusion of $0.5 million in stock-based compensation that were not present in the corresponding periods of fiscal 2005. Operating income decreased for the nine months ended at September 29, 2006 compared to same period in fiscal 2005, primarily due to a reduction in revenue in our automotive and timing businesses, relatively flat sales in our Military and Advanced Systems product line, increased development cost related to the TrimTrac® GSM version and inclusion of $1.4 million in stock-based compensation that were not present in the corresponding periods of fiscal 2005, partially offset due to stronger Applanix and intellectual property licensing revenue.


Research and Development, Sales and Marketing, and General and Administrative Expenses

Research and development (“R&D”), sales and marketing (“S&M”), and general and administrative (“G&A”) expenses are summarized in the following table (in thousands, except percentages):
 
 
Three Months Ended
 
Nine Months Ended
               
 
September 29,
 
September 30,
 
September 29,
 
September 30,
 
2006
 
2005
 
2006
 
2005
Research and development
25,180
 
20,639
 
77,234
 
63,332
Percentage of revenue
11%
 
11%
 
11%
 
11%
Sales and marketing
34,902
 
29,313
 
103,356
 
88,388
Percentage of revenue
15%
 
16%
 
15%
 
15%
General and administrative
17,981
 
13,448
 
50,016
 
38,204
Percentage of revenue
8%
 
7%
 
7%
 
6%
Total
78,063
 
63,400
 
230,606
 
189,924
Percentage of revenue
33%
 
34%
 
33%
 
32%
 
Page 22

Overall, R&D, S&M, and G&A expense increased by approximately $14.7 million and $40.6 million for the three and nine months ended September 29, 2006 compared to the same corresponding periods in fiscal 2005. Included in the increase were approximately $2.9 million and $9.4 million of stock-based compensation for the three and nine months ended September 29, 2006, respectively, not included in the prior year periods.

The increase in R&D expenses in the third quarter of fiscal 2006 compared with the third quarter of fiscal 2005 was primarily due to the inclusion of expenses of $1.7 million from acquisitions not applicable in the prior fiscal quarter, $1.4 million increase in compensation related expenses, $0.6 million in stock-based compensation expense which was not present in the third quarter of fiscal 2005.

The increase in R&D expenses in the first nine months of fiscal 2006 compared with the corresponding period in fiscal 2005 was primarily due to the to the inclusion of expenses of $3.8 million from acquisitions not applicable in the prior corresponding period, $3.0 million increase in compensation related expenses, $1.9 million in stock-based compensation expense not present in the nine months ended September 30, 2005, $0.6 million increase in consulting fees, and $1.1 million increase in R&D materials expenses which was primarily due to compliance with the European lead free initiative.

All of our R&D costs have been expensed as incurred. Cost of software developed for external sale subsequent to reaching technical feasibility were not considered material and were expensed as incurred.

* We believe that the development and introduction of new products are critical to our future success and we expect to continue active development of new products.

The increase in S&M expenses in the third quarter of fiscal 2006 as compared with the corresponding period of fiscal 2005 was primarily due the inclusion of expenses from acquisitions not applicable in the prior period of $2.4 million, $1.6 million increase in compensation-related expenses, and $0.7 million in stock-based compensation expense not present in the third quarter of fiscal 2005. The increase in S&M expenses in the first nine months of fiscal 2006 as compared with the corresponding period of fiscal 2005 was primarily due the inclusion of expenses from acquisitions not applicable in the prior period in the amount of $4.8 million, $5.3 million increase in compensation related expenses, and $2.1 million in stock-based compensation expense not present in the third quarter of fiscal 2005.

* Our future growth will depend in part on the timely development and continued viability of the markets in which we currently compete as well as our ability to continue to identify and develop new markets for our products.

The increase in G&A expenses in the third quarter of fiscal 2006 compared with the corresponding period in fiscal 2005 was primarily due the inclusion of expenses from acquisitions not applicable in the prior year of $1.1 million, $1.3 million increase in compensation-related expenses, and $1.4 million in stock-based compensation expense not present in the third quarter of the fiscal 2005. The increase in G&A expenses in the first nine months of fiscal 2006 compared with the corresponding period in fiscal 2005 was primarily due the inclusion of expenses from acquisitions not applicable in the prior year of $2.6 million, $3.8 million increase in compensation-related expenses, and $4.5 million in stock-based compensation expense not present in the third quarter of fiscal 2005.

Amortization of Purchased Intangible Assets
 
Amortization of purchased intangible assets was $2.9 million, of which $1.1 million was recorded in cost of sales, in the third quarter of fiscal 2006, compared with $0.9 million in the third quarter of fiscal 2005. The increase was due to several acquisitions made by the Company since the last fiscal year. Amortization of purchased intangible assets was $8.9 million, of which $3.3 million was recorded in cost of revenue, in the first nine months of fiscal 2006, compared with $5.3 million in the first nine months of fiscal 2005. The increase was primarily due to the acquisition of certain technology and patent intangibles as a result of acquisitions not applicable in the comparable period of fiscal 2005.

In-Process Research and Development
 
We recorded In-process research and development (IPR&D) expense of $50,000 and $1.0 million related to acquisitions during the three and nine month period ended September 29, 2006, respectively. We did not record any IPR&D expense during the same corresponding periods in fiscal 2005. At the date of each acquisition, the projects associated with the IPR&D efforts had not yet reached technological feasibility and the research and development in process had no alternative future uses. The value of the IPR&D was determined using a discounted cash flow model similar to the income approach, focusing on the income producing capabilities of the in-process technologies. Accordingly, the value assigned to these IPR&D amounts were charged to expense on the respective acquisition date of each of the acquired companies.

Restructuring Charges

We did not record any restructuring charges during the third quarter of fiscal 2006 and 2005. During the first quarter of fiscal 2005, we recorded a restructuring charge of approximately $0.3 million associated with the closure of one of our sales offices as a result of integration efforts of a previous acquisition. There were no restructuring charges recorded during the first quarter of 2006. Payments of $0.1 million and $0.3 million were made during each of the three and nine months ended September 29, 2006 and September 30, 2005, respectively, relating to previous restructuring plans.  As of September 29, 2006, the remaining restructuring accrual balance is $0.2 million, which is related to the office closure, and is expected to be paid over the next year. The restructuring accrual is included on the Condensed Consolidated Balance Sheets under the heading of “Accrued Liabilities.”
 
Page 23

Non-operating Income (Expense), Net

The components of non-operating income (expense), net, are as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
   
September 29,
     
September 30,
     
September 29,
     
September 30,
 
   
2006
     
2005
     
2006
     
2005
 
(In thousands)
                             
                               
Interest income (expense), net
$
1,315
   
$
(650) 
   
$
2,347
   
$
(1,680) 
 
Foreign currency transaction gain, net
 
67
     
61 
     
995
     
67 
 
Income (expenses) for affiliated operations, net
 
1,047
     
(1,976) 
     
4,238
     
(7,514) 
 
Other income, net
 
228
     
119 
     
409
     
287 
 
Total non-operating income (expense), net
$
2,657
   
$
(2,446) 
   
$
7,989
   
$
(8,840) 
 

Non-operating income, net, increased by $5.1 million or 209% for third quarter of fiscal 2006 compared with the corresponding period in fiscal 2005, primarily due to a $3.0 million increase in income from affiliated operations, resulting from the absence of $2.6 million in net transfer pricing expense with CTCT that was included in the third quarter of fiscal 2005, but is now included in operating income in fiscal 2006. In addition, non-operating income increased due to an increase in net interest income of $1.9 million as a result of interest expense incurred in the third quarter of fiscal 2005 on debt subsequently repaid, higher interest income earned on the investment of cash balances and the absence of a one-time write-off of debt issuance cost in the third quarter of fiscal 2005.

Non-operating income, net, increased by $16.8 million or 190% during the first nine months of fiscal 2006 compared with the corresponding period in fiscal 2005 primarily due to a $11.7 million increase in income from affiliated operations, the absence of $8.7 million in transfer pricing expense with CTCT that were included in the first nine months of fiscal 2005, but now included in operating income in fiscal 2006. In addition, non-operating income increased due to an increase in net interest income of $4.0 million as a result of interest expense incurred in the second quarter of fiscal 2005 on debt subsequently repaid, higher interest income earned on the investment of cash balances, the absence of a one-time write-off of debt issuance cost in the third quarter of fiscal 2005, and a $0.9 million increase in foreign currency transaction gains.


Income Tax Provision

Our income tax provision reflects a tax rate of 35 .0% and 31.4% for the three and nine months ended September 29, 2006, respectively.  The tax rate for the comparable periods in fiscal 2005 was 34%. The 2006 year-to-date tax rate is lower than the 2005 tax rate due to the favorable outcome of two foreign income tax audits and results from an amended tax return, but offset by the impact of  the  accounting for stock based compensation in accordance with  SFAS 123R. 

We anticipate a tax rate in the fourth quarter of 2006 of 36%, resulting in an annual tax rate of approximately 32%.  The tax rate could be affected by several factors including stock option activity, geographic mix of our pre-tax income, legislative changes, changes to our existing valuation allowance, or other discrete events in the quarter.


Critical Accounting Policies
 
We believe that there have been no significant changes during the nine months ended September 29, 2006 to the items that we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our 2005 Form 10-K, except as noted below.

Page 24

Stock-based Compensation

We have adopted the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123(R)”) using the modified prospective method which requires the adoption of the accounting standard for fiscal years beginning June 15, 2005. As a result, our financial statements for fiscal periods after December 30, 2005 will include stock-based compensation expenses that are not comparable to financial statements of fiscal periods prior to December 30, 2005. SFAS 123(R) requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the requisite service periods of the related employees in the Company’s Condensed Consolidated Statement of Income. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based compensation to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Condensed Consolidated Statement of Income because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

For options granted prior to October 1, 2005, the fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model. For stock options granted on or after October 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. In addition,   the binomial model incorporates actual option-pricing behavior and changes in volatility over the option’s contractual term. For these reasons, we believe that the binomial model provides a fair value for stock options that is more representative of actual experience and future expected experience than the value calculated using the Black-Scholes model. The fair value of rights granted under the Employee Stock Purchase Plan is estimated at the date of grant using the Black-Scholes option-pricing model.

For the three and nine months ended September 29, 2006, we recognized $2.9 million and $9.4 million in net stock-based compensation expense, respectively. This is compared to the three and nine months ended September 30, 2005 pro forma net stock-based compensation expense of $2.6 million and $8.4 million, respectively. As of September 29, 2006, the total unamortized stock option expense is $14.5 million with a weighted-average recognition period of 1.5 years.

See Note 3 to the Notes to the Condensed Consolidated Financial Statements for additional information.


OFF-BALANCE SHEET FINANCINGS AND LIABILITIES
 
Other than lease commitments incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the condensed consolidated financial statements. Additionally, we do not have any interest in, or relationship with, any special purpose entities.

LIQUIDITY AND CAPITAL RESOURCES

As of
September 29, 2006
 
December 30, 2005
(dollars in thousands)
     
       
Cash and cash equivalents
$ 136,402
 
$ 73,853
Accounts receivable days sales outstanding
59
 
66
Inventory turns per year
4
 
4
Total debt
$ 757
 
$ 649
       
Nine Months Ended
September 29, 2006
 
September 30, 2005
(in thousands)
     
       
Net cash provided by operating activities
$ 85,767 
 
$ 69,596  
Net cash used in investing activities
$ (57,149)
 
(35,568) 
Net cash provided (used) in financing activities
$ 31,311 
 
(16,979) 
Net increase in cash and cash equivalents
$ 62,549 
 
15,421  

Cash and Cash Equivalents

Our financial condition further strengthened as cash and cash equivalents totaled $136.4 million at September 29, 2006, compared to $73.9 million at December 30, 2005. We essentially have no debt at September 29, 2006.

Page 25

* For the first nine months of fiscal 2006, cash provided by operating activities was $85.8 million, compared to $69.6 million in cash provided by operating activities during the first nine months of fiscal 2005. This increase of $16.2 million was primarily driven by a $27.6 million increase in net income before stock-based compensation expense, partially offset by an $8.8 million decrease in deferred income taxes. Our ability to continue to generate cash from operations will depend in large part on profitability, the rate of collections of accounts receivable, our inventory turns, and our ability to manage other areas of working capital. Our accounts receivable days for sales outstanding improved to 59 days at the end of the third quarter of fiscal 2006, from 66 days at the end of fiscal 2005. The decrease is primarily due to increased collection efforts and improvement in monitoring of outstanding receivables. In addition, in the first quarter of 2006, the Company rolled out a dealer floor plan financing program in the U.S. and Canada through a non-recourse financing facility. Our inventory turns were unchanged at four for the first nine months of fiscal 2006 and at fiscal year end 2005.

We used $57.1 million in net cash for investing activities during the first nine months of 2006, compared to $35.6 million in the first nine months of 2005. The $21.5 million increase in spending was due to an increase of $21.6 million in cash used for acquisitions.

* We expect fiscal 2006 capital expenditures to be approximately $15 million to $20 million, primarily for computer equipment, software, manufacturing tools and test equipment, and leasehold improvements associated with business expansion.   Decisions related to how much cash is used for investing are influenced by the expected amount of cash to be provided by operations.

We generated $31.3 million in net cash from financing activities in the first nine months of 2006, compared to $17.0 million in cash used during the first nine months of 2005. The $48.3 million improvement was primarily due to a $38.3 million decrease in repayment of net debt, $8.1 million in excess tax benefits relating to stock-based compensation upon the exercise of stock options which were not present in the first nine months of fiscal 2005 and a $3.3 million increase in proceeds received from issuance of common stock.

* We believe that our cash and cash equivalents, together with our credit facilities ($200 million as of September 29, 2006), will be sufficient to meet our anticipated operating cash needs for at least the next twelve months.
 
 
Debt

At September 29, 2006, our total debt was approximately $0.8 million compared to $0.6 million at the end of fiscal 2005. This relates to government loans to foreign subsidiaries and loans assumed from acquisitions.

On July 28, 2005, we entered into a $200 million unsecured revolving credit agreement (“2005 Credit Facility”) with a syndicate of 10 banks with The Bank of Nova Scotia as the administrative agent. The 2005 Credit Facility replaces our $175 million secured 2003 Credit Facility. The funds available under the new 2005 Credit Facility may be used for our general corporate purposes and up to $25 million of the 2005 Credit Facility may be used for letters of credit. We incur a commitment fee if the 2005 Credit Facility is not used. The commitment fee is not material to our results during all periods presented. As of September 29, 2006, the Company had a zero balance outstanding under the 2005 Credit Facility and was in compliance with all financial covenants.


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We use certain derivative financial instruments to manage these risks. We do not use derivative financial instruments for speculative purposes. All financial instruments are used in accordance with policies approved by our board of directors.

Market Interest Rate Risk

There has been no change to our market interest rate risk assessment. Refer to our 2005 Annual Report on Form 10-K.

Foreign Currency Exchange Rate Risk

We enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain trade and inter-company receivables and payables, primarily denominated in Australian, Canadian, Japanese, New Zealand, South African and Swedish currencies, the Euro, and the British pound. These contracts reduce the exposure to fluctuations in exchange rate movements as the gains and losses associated with foreign currency balances are generally offset with the gains and losses on the forward contracts. These instruments are marked to market through earnings every period and generally range from one to three months in original maturity. We do not enter into foreign exchange forward contract for trading purposes.

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Foreign exchange forward contracts outstanding as of September 29, 2006 are summarized as follows (in thousands):

   
September 29, 2006
   
Nominal Amount
 
Fair Value
Forward contracts:
         
 
Purchased
$
(16,382)
 
$
(43)
 
Sold
$
35,298
 
$
345 

* We do not anticipate any material adverse effect on our consolidated financial position utilizing our current hedging strategy.


ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

(b) Internal Control Over Financial Reporting.

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Page 27


PART II.   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation arising out of the ordinary course of its business. There are no known claims or pending litigation expected to have a material effect on the Company’s overall financial position, results of operations, or liquidity.

ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors, in addition to the other information contained in this Form 10-Q and in any other documents to which we refer you in this Form 10-Q, before purchasing our securities. The risks and uncertainties described below are not the only ones we face.

Our Inability to Accurately Predict Orders and Shipments May Affect Our Revenue, Expenses and Earnings per Share .

We have not been able in the past to consistently predict when our customers will place orders and request shipments so that we cannot always accurately plan our manufacturing requirements. As a result, if orders and shipments differ from what we predict, we may incur additional expenses and build excess inventory, which may require additional reserves and allowances. Any significant change in our customers’ purchasing patterns could have a material adverse effect on our operating results and reported earnings per share for a particular quarter.

Our Operating Results in Each Quarter May Be Affected by Special Conditions, Such As Seasonality, Late Quarter Purchases, Weather, and Other Potential Issues.

Due in part to the buying patterns of our customers, a significant portion of our quarterly revenues occurs from orders received and immediately shipped to customers in the last few weeks and days of each quarter, although our operating expenses tend to remain fairly predictable. Engineering and construction purchases tend to occur in early spring, and governmental agencies tend to utilize funds available at the end of the government’s fiscal year for additional purchases at the end of our third fiscal quarter in September of each year. Concentrations of orders sometimes also occur at the end of our other two fiscal quarters. Additionally, a majority of our sales force earns commissions on a quarterly basis which may cause concentrations of orders at the end of any fiscal quarter. If for any reason expected sales are deferred, orders are not received, or shipments are delayed a few days at the end of a quarter, our operating results and reported earnings per share for that quarter could be significantly impacted.

We Are Dependent on a Specific Manufacturer and Assembler for Many of Our Products and on Specific Suppliers of Critical Parts for Our Products.

We are substantially dependent upon Solectron Corporation in California, China and Mexico as our preferred manufacturing partner for many of our GPS products previously manufactured out of our Sunnyvale facilities. Under the agreement with Solectron, we provide to Solectron a twelve-month product forecast and place purchase orders with Solectron at least thirty calendar days in advance of the scheduled delivery of products to our customers depending on production lead time. Although purchase orders placed with Solectron are cancelable, the terms of the agreement would require us to purchase from Solectron all inventory not returnable or usable by other Solectron customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate manufacturing capacity from Solectron to meet customers’ delivery requirements or we may accumulate excess inventories, if such inventories are not usable by other Solectron customers. Our current contract with Solectron continues in effect until either party gives the other ninety days written notice .

In addition, we rely on specific suppliers for a number of our critical components. We have experienced shortages of components in the past. Our current reliance on specific or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could significantly delay our ability to ship our products, which could damage relationships with current and prospective customers and could harm our reputation and brand, and could have a material adverse effect on our business.

Our Annual and Quarterly Performance May Fluctuate.

Our operating results have fluctuated and can be expected to continue to fluctuate in the future on a quarterly and annual basis as a result of a number of factors, many of which are beyond our control. Results in any period could be affected by:

·  
changes in market demand,
·  
competitive market conditions,
·  
market acceptance of existing or new products,
·  
fluctuations in foreign currency exchange rates,
·  
the cost and availability of components,
·  
our ability to manufacture and ship products,
·  
the mix of our customer base and sales channels,
·  
the mix of products sold,
·  
our ability to expand our sales and marketing organization effectively,
·  
our ability to attract and retain key technical and managerial employees,
·  
the timing of shipments of products under contracts and
·  
general global economic conditions.

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In addition, demand for our products in any quarter or year may vary due to the seasonal buying patterns of our customers in the agricultural and engineering and construction industries. Due to the foregoing factors, our operating results in one or more future periods are expected to be subject to significant fluctuations. The price of our common stock could decline substantially in the event such fluctuations result in our financial performance being below the expectations of public market analysts and investors, which are based primarily on historical models that are not necessarily accurate representations of the future.

Our Gross Margin Is Subject to Fluctuation.

Our gross margin is affected by a number of factors, including product mix, product pricing, cost of components, foreign currency exchange rates and manufacturing costs. For example, sales of Nikon-branded products generally have lower gross margins as compared to our GPS survey products. Absent other factors, a shift in sales towards Nikon-branded products would lead to a reduction in our overall gross margins. A decline in gross margin could potentially negatively impact our earnings per share.

Failure to maintain effective internal controls in compliance with Section 404 of the Sarbanes-Oxley Act could have an adverse effect on our business and stock price.

Section 404 of the Sarbanes-Oxley Act requires us to include an internal control report of management in our Annual Report on Form 10-K. For fiscal 2004 and 2005 we satisfied the requirements of Section 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments.

A system of controls, however well designed and operated, cannot provide absolute assurance that the objectives of the system will be met. In addition, the design of a control system is based in part upon certain assumptions about the likelihood of future events. Because of the inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.

We Are Dependent on New Products.

Our future revenue stream depends to a large degree on our ability to bring new products to market on a timely basis. We must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance of such products. We may incur problems in the future in innovating and introducing new products. Our development stage products may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we were unable to successfully define, develop and introduce competitive new products, and enhance existing products, our future results of operations would be adversely affected. Development and manufacturing schedules for technology products are difficult to predict, and we might not achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success. A delay in new product introductions could have a significant impact on our results of operations.

We Are Dependent on Proprietary Technology.

Our future success and competitive position is dependent upon our proprietary technology, and we rely on patent, trade secret, trademark and copyright law to protect our intellectual property. The patents owned or licensed by us may be invalidated, circumvented, and challenged. The rights granted under these patents may not provide competitive advantages to us. Any of our pending or future patent applications may not be issued within the scope of the claims sought by us, if at all.

Others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned by us. In addition, effective copyright, patent and trade secret protection may be unavailable, limited or not applied for in certain countries. The steps taken by us to protect our technology might not prevent the misappropriation of such technology.

The value of our products relies substantially on our technical innovation in fields in which there are many current patent filings. We recognize that as new patents are issued or are brought to our attention by the holders of such patents, it may be necessary for us to withdraw products from the market, take a license from such patent holders, or redesign our products. We do not believe any of our products currently infringe patents or other proprietary rights of third parties, but we cannot be certain they do not do so. In addition, the legal costs and engineering time required to safeguard intellectual property or to defend against litigation could become a significant expense of operations. Such events could have a material adverse effect on our revenues or profitability.

Page 29

Our products may contain errors or defects, which could result in damage to our reputation, lost revenues, diverted development resources and increased service costs, warranty claims and litigation.
 
Our devices are complex and must meet stringent requirements. We warrant that our products will be free of defect for various periods of time, depending on the product. In addition, certain of our contracts include epidemic failure clauses. If invoked, these clauses may entitle the customer to return or obtain credits for products and inventory, or to cancel outstanding purchase orders even if the products themselves are not defective.

We must develop our products quickly to keep pace with the rapidly changing market, and we have a history of frequently introducing new products. Products and services as sophisticated as ours could contain undetected errors or defects, especially when first introduced or when new models or versions are released. In general, our products may not be free from errors or defects after commercial shipments have begun, which could result in damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs and warranty claims and litigation which could harm our business, results of operations and financial condition.

We Are Dependent on the Availability of Allocated Bands within the Radio Frequency Spectrum.

Our GPS technology is dependent on the use of the Standard Positioning Service (“SPS”) provided by the US Government’s GPS. The GPS SPS operates in radio frequency bands that are globally allocated for radio navigation satellite services. International allocations of radio frequency are made by the International Telecommunications Union (“ITU”), a specialized technical agency of the United Nations. These allocations are further governed by radio regulations that have treaty status and which may be subject to modification every two to three years by the World Radio Communication Conference.

Any ITU reallocation of radio frequency bands, including frequency band segmentation or sharing of spectrum, may materially and adversely affect the utility and reliability of our products. Many of our products use other radio frequency bands, together with the GPS signal, to provide enhanced GPS capabilities, such as real-time kinematic precision. The continuing availability of these non-GPS radio frequencies is essential to provide enhanced GPS products to our precision survey and construction machine controls markets. Any regulatory changes in spectrum allocation or in allowable operating conditions may cause a material adverse effect on our operating results.

In addition, unwanted emissions from mobile satellite services and other equipment operating in adjacent frequency bands or in-band from licensed and unlicensed devices may materially and adversely affect the utility and reliability of our products. The FCC continually receives proposals for novel technologies and services, such as ultra-wideband technologies, which may seek to operate in, or across, the radio frequency bands currently used by the GPS SPS and other public safety services. Adverse decisions by the FCC that result in harmful interference to the delivery of the GPS SPS and other radio frequency spectrum also used in our products may result in a material adverse effect on our business and financial condition.

Many of Our Products Rely on the GPS Satellite System.

The GPS satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites currently in orbit were originally designed to have lives of 7.5 years and are subject to damage by the hostile space environment in which they operate. However, of the current deployment of 29 satellites in place, some have already been in operation for 12 years. To repair damaged or malfunctioning satellites is currently not economically feasible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. A reduction in the number of operating satellites may impair the current utility of the GPS system and the growth of current and additional market opportunities.

In 2004, a Presidential policy affirmed a 1996 Presidential Decision Directive that marked the first time in the evolution of GPS that access for civilian use free of direct user fees. In addition, Presidential policy has been complemented by corresponding legislation, that was signed into law. However, there can be no assurance that the US Government will remain committed to the operation and maintenance of GPS satellites over a long period, or that the policies of the US Government for the use of GPS without charge will remain unchanged. Because of ever-increasing commercial applications of GPS, other US Government agencies may become involved in the administration or the regulation of the use of GPS signals. Any of the foregoing factors could affect the willingness of buyers of our products to select GPS-based systems instead of products based on competing technologies.

Many of our products also use signals from systems that augment GPS, such as the Wide Area Augmentation System (WAAS) and National Differential GPS System (NDGPS). Many of these augmentation systems are operated by the federal government and rely on continued funding and maintenance of these systems. In addition, some of our products also use satellite signals from the Russian Glonass System. Any curtailment of the operating capability of these systems could result in decreased user capability thereby impacting our markets.

The European governments have begun development of an independent satellite navigation system, known as Galileo. We have access to the preliminary signal design, which is subject to change. Although an operational Galileo system is several years away, if we are unable to timely develop a commercial product, it may have a materially adverse effect on our business and operating results.

Page 30

We may be Materially Affected by New Regulatory Requirements.
 
We are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of non-hazardous and hazardous wastes, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties, or the imposition of other liabilities.

In particular, under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties impacted by such contamination. In addition, we face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of many of our products. The European Union (“EU”) has adopted new directives to facilitate the recycling of electrical and electronic equipment sold in the EU. One of these is the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) directive. The RoHS directive restricts the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union after July 1, 2006.

Similar laws and regulations have been or may be enacted in other regions, including in the United States, China and Japan. Other environmental regulations may require us to reengineer our products to utilize components which are more environmentally compatible and such reengineering and component substitution may result in additional costs to us. Although we do not anticipate any material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on our business.
 
Our Business is Subject to Disruptions and Uncertainties Caused by War or Terrorism.

Acts of war or acts of terrorism could have a material adverse impact on our business, operating results, and financial condition. The threat of terrorism and war and heightened security and military response to this threat, or any future acts of terrorism, may cause further disruption to our economy and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of orders, or the manufacture or shipment of our products, our business, operating results, and financial condition could be materially and adversely affected.
 
We Are Exposed to Fluctuations in Currency Exchange Rates.

A significant portion of our business is conducted outside the US, and as such, we face exposure to movements in non-US currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows. Fluctuation in currency impacts our operating results.

Currently, we hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. The hedging activities undertaken by us are intended to offset the impact of currency fluctuations on certain non-functional currency assets and liabilities. Our attempts to hedge against these risks may not be successful resulting in an adverse impact on our net income.

We Face Risks in Investing in and Integrating New Acquisitions.

We have recently acquired several companies and may in the future acquire other companies. Acquisitions of companies, divisions of companies, or products entail numerous risks, including:

·  
potential inability to successfully integrate acquired operations and products or to realize cost savings or other anticipated benefits from integration;
·  
diversion of management’s attention;
·  
loss of key employees of acquired operations;
·  
the difficulty of assimilating geographically dispersed operations and personnel of the acquired companies;
·  
the potential disruption of our ongoing business;
·  
unanticipated expenses related to such integration;
·  
the correct assessment of the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount which must be amortized over the appropriate life of the asset;
·  
the impairment of relationships with employees and customers of either an acquired company or our own business;
·  
the potential unknown liabilities associated with acquired business; and
·  
inability to recover strategic investments in development stage entities.

As a result of such acquisitions, we have significant assets that include goodwill and other purchased intangibles. The testing of these intangibles under established accounting guidelines for impairment requires significant use of judgment and assumptions. Changes in business conditions could require adjustments to the valuation of these assets. In addition, losses incurred by a company in which we have an investment may have a direct impact on our financial statements or could result in our having to write-down the value of such investment. Any such problems in integration or adjustments to the value of the assets acquired could harm our growth strategy and have a material adverse effect on our business, financial condition and compliance with debt covenants.

We May Not Be Able to Enter Into or Maintain Important Alliances.

We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon, and CNH Global. Our failure to form and maintain such alliances, or the pre-emption of such alliances by actions of other competitors or us, will adversely affect our ability to penetrate emerging markets. No assurances can be given that we will not experience problems from current or future alliances or that we will realize value from any such strategic alliances.

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We Face Competition in Our Markets.

Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets. Within each of our markets, we encounter direct competition from other GPS, optical and laser suppliers and competition may intensify from various larger US and non-US competitors and new market entrants, particularly from emerging markets such as China and India, some of which may be our current customers. The competition in the future may, in some cases, result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition. We believe that our ability to compete successfully in the future against existing and additional competitors will depend largely on our ability to execute our strategy to provide systems and products with significantly differentiated features compared to currently available products. We may not be able to implement this strategy successfully, and our products may not be competitive with other technologies or products that may be developed by our competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do.

We Must Carefully Manage Our Future Growth.

Growth in our sales or continued expansion in the scope of our operations could strain our current management, financial, manufacturing and other resources, and may require us to implement and improve a variety of operating, financial and other systems, procedures, and controls. We have recently implemented a new enterprise resource planning software system and we may experience in our financial and order management processing as a result of new procedures. Problems associated with any improvement or expansion of these systems, procedures or controls may adversely affect our operations and these systems, procedures or controls may not be designed, implemented or improved in a cost-effective and timely manner. Any failure to implement, improve and expand such systems, procedures, and controls in a timely and efficient manner could harm our growth strategy and adversely affect our financial condition and ability to achieve our business objectives.

We Are Subject to the Impact of Governmental and Other Similar Certifications.

We market certain products that are subject to governmental and similar certifications before they can be sold. For example, CE certification for radiated emissions is required for most GPS receiver and data communications products sold in the European Union. An inability to obtain such certifications in a timely manner could have an adverse effect on our operating results. Also, some of our products that use integrated radio communication technology require an end user to obtain licensing from the Federal Communications Commission (FCC) for frequency-band usage. These are secondary licenses that are subject to certain restrictions. An inability or delay in obtaining such certifications or changes to the rules by the FCC could adversely affect our ability to bring our products to market which could harm our customer relationships and have a material adverse effect on our business.

We Are Subject to the Adverse Impact of Radio Frequency Congestion.

We have certain products, such as GPS RTK systems, and surveying and mapping systems that use integrated radio communication technology requiring access to available radio frequencies allocated by the FCC (or the NTIA in the case of federal government users of this equipment) for which the end user is required to obtain a license in order to operate their equipment. In addition, access to these frequencies by state agencies is under management by state radio communications coordinators. Some bands are experiencing congestion that excludes their availability for access by state agencies in some states. To reduce congestion, the FCC announced that it will require migration of radio technology from wideband to narrowband operations in these bands. The rules require migration of users to narrowband channels by 2011. In the meantime congestion could cause FCC coordinators to restrict or refuse licenses. An inability to obtain access to these radio frequencies by end users could have an adverse effect on our operating results.

The Volatility of Our Stock Price Could Adversely Affect Your Investment in Our Common Stock.

The market price of our common stock has been, and may continue to be, highly volatile. During the third fiscal quarter of 2006, our stock price ranged from $42.58 to $51.10. We believe that a variety of factors could cause the price of our common stock to fluctuate, perhaps substantially, including:

·  
announcements and rumors of developments related to our business or the industry in which we compete;
·  
quarterly fluctuations in our actual or anticipated operating results and order levels;
·  
general conditions in the worldwide economy, including fluctuations in interest rates;
·  
announcements of technological innovations;
·  acquisition announcements; 
·  
new products or product enhancements by us or our competitors;
·  
developments in patents or other intellectual property rights and litigation;
·  
developments in our relationships with our customers and suppliers; and
·  
any significant acts of terrorism against the United States.

In addition, in recent years the stock market in general and the markets for shares of "high-tech" companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of our common stock, and the market price of our common stock may decline.
 
Provisions in Our Charter Documents and Under California Law Could Prevent or Delay a Change of Control, which Could Reduce the Market Price of Our Common Stock.

Certain provisions of our articles of incorporation, as amended and restated, our bylaws, as amended and restated, and the California General Corporation Law may be deemed to have an anti-takeover effect and could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of us without approval of our board of directors. These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain provisions allow the board of directors to authorize the issuance of preferred stock with rights superior to those of the common stock.

We have adopted a Preferred Shares Rights Agreement, commonly known as a "poison pill." The provisions described above, our poison pill and provisions of the California General Corporation Law may discourage, delay or prevent a third party from acquiring us.


Page 32




ITEM 6. EXHIBITS

3.1
Restated Articles of Incorporation of the Company filed June 25, 1986. (3)
3.2
Certificate of Amendment of Articles of Incorporation of the Company filed October 6, 1988. (3)
3.3
Certificate of Amendment of Articles of Incorporation of the Company filed July 18, 1990. (3)
3.4
Certificate of Determination of Rights, Preferences and Privileges of Series A Preferred Participating Stock of the Company filed February 19, 1999. (3)
3.5
Certificate of Amendment of Articles of Incorporation of the Company filed May 29, 2003. (7)
3.6
Certificate of Amendment of Articles of Incorporation of the Company filed March 4, 2004. (8)
3.7
Bylaws of the Company, amended and restated through July 20, 2006. (10)
4.1
Specimen copy of certificate for shares of Common Stock of the Company. (1)
4.2
Preferred Shares Rights Agreement dated as of February 18, 1999. (2)
4.3
Agreement of Substitution and Amendment of Preferred Shares Rights Agreement dated September 10, 2004. (9)
4.4
First Amended and Restated Stock and Warrant Purchase Agreement between and among the Company and the investors thereto dated January 14, 2002. (4)
4.5
Form of Warrant to Purchase Shares of Common Stock dated January 14, 2002. (5)
4.6
Form of Warrant dated April 12, 2002. (6)
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
(1)
Incorporated by reference to exhibit number 4.1 to the registrant's Registration Statement on Form S-1, as amended (File No. 33-35333), which became effective July 19, 1990.
(2)
Incorporated by reference to exhibit number 1 to the registrant's Registration Statement on Form 8-A, which was filed on February 18, 1999.
(3)
Incorporated by reference to identically numbered exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1999.
(4)
Incorporated by reference to exhibit number 4.1 to the registrant's Current Report on Form 8-K filed on January 16, 2002.
(5)
Incorporated by reference to exhibit number 4.2 to the registrant's Current Report on Form 8-K filed on January 16, 2002.
(6)
Incorporated by reference to exhibit number 4.1 to the registrant’s Registration Statement on Form S-3 filed on April 19, 2002.
(7)
Incorporated by reference to exhibit number 3.5 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2003.
(8)
Incorporated by reference to exhibit number 3.6 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2004.
(9)
Incorporated by reference to exhibit number 4.3 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
(10)
Filed herewith.


Page 33


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

TRIMBLE NAVIGATION LIMITED
(Registrant)
 
                       By:  /s/ Rajat Bahri    
    Rajat Bahri
    Chief Financial Officer
    (Authorized Officer and Principal
    Financial Officer)



DATE: November 3, 2006

Page 34


EXHIBIT INDEX

Exhibit No.          Description
 
3.1
Restated Articles of Incorporation of the Company filed June 25, 1986. (3)
3.2
Certificate of Amendment of Articles of Incorporation of the Company filed October 6, 1988. (3)
3.3
Certificate of Amendment of Articles of Incorporation of the Company filed July 18, 1990. (3)
3.4
Certificate of Determination of Rights, Preferences and Privileges of Series A Preferred Participating Stock of the Company filed February 19, 1999. (3)
3.5
Certificate of Amendment of Articles of Incorporation of the Company filed May 29, 2003. (7)
3.6
Certificate of Amendment of Articles of Incorporation of the Company filed March 4, 2004. (8)
3.7
Bylaws of the Company, amended and restated through July 20, 2006. (10)
4.1
Specimen copy of certificate for shares of Common Stock of the Company. (1)
4.2
Preferred Shares Rights Agreement dated as of February 18, 1999. (2)
4.3
Agreement of Substitution and Amendment of Preferred Shares Rights Agreement dated September 10, 2004. (9)
4.4
First Amended and Restated Stock and Warrant Purchase Agreement between and among the Company and the investors thereto dated January 14, 2002. (4)
4.5
Form of Warrant to Purchase Shares of Common Stock dated January 14, 2002. (5)
4.6
Form of Warrant dated April 12, 2002. (6)
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 3, 2006. (10)
(1)
Incorporated by reference to exhibit number 4.1 to the registrant's Registration Statement on Form S-1, as amended (File No. 33-35333), which became effective July 19, 1990.
(2)
Incorporated by reference to exhibit number 1 to the registrant's Registration Statement on Form 8-A, which was filed on February 18, 1999.
(3)
Incorporated by reference to identically numbered exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1999.
(4)
Incorporated by reference to exhibit number 4.1 to the registrant's Current Report on Form 8-K filed on January 16, 2002.
(5)
Incorporated by reference to exhibit number 4.2 to the registrant's Current Report on Form 8-K filed on January 16, 2002.
(6)
Incorporated by reference to exhibit number 4.1 to the registrant’s Registration Statement on Form S-3 filed on April 19, 2002.
(7)
Incorporated by reference to exhibit number 3.5 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2003.
(8)
Incorporated by reference to exhibit number 3.6 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2004.
(9)
Incorporated by reference to exhibit number 4.3 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
(10)
Filed herewith.
 


 
EXHIBIT 3.7
 
BYLAWS

OF

TRIMBLE NAVIGATION LIMITED
(amended and restated through July 20, 2006)

 

1


 
TABLE OF CONTENTS

ARTICLE I
CORPORATE OFFICES  
 
1.1 PRINCIPAL OFFICE
5
1.2 OTHER OFFICES
5
 
ARTICLE II
MEETINGS OF   SHAREHOLDERS
 
2.1 PLACE OF MEETINGS
5
2.2 ANNUAL MEETING
5
2.3 SPECIAL MEETING
6
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
6
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
7
2.6 QUORUM
7
2.7 ADJOURNED MEETING; NOTICE
7
2.8 VOTING
8
2.9   VALIDATION OF MEETINGS: WAIVER OF NOTICE; CONSENT
9
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
9
2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS
10
2.12 PROXIES
10
2.13 INSPECTORS OF ELECTION
11
 
ARTICLE III
DIRECTORS
 
3.1 POWERS
12
3.2 NUMBER AND QUALIFICATION OF DIRECTORS
12
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
12
3.4 VACANCIES
12
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
13
3.6 REGULAR MEETINGS
13
3.7 SPECIAL MEETINGS
14
3.8 QUORUM
14
3.9 WAIVER OF NOTICE
14
3.10 ADJOURNMENT
15
3.11 NOTICE OF ADJOURNMENT
15
3.12 ACTION WITHOUT MEETING
15
3.13 FEES AND COMPENSATION OF DIRECTORS
15
3.14 APPROVAL OF LOANS TO OFFICERS
15

2

ARTICLE IV
COMMITTEES
 
4.1 COMMITTEES OF DIRECTORS
15
4.2 MEETINGS AND ACTION OF COMMITTEES
16
 
ARTICLE V
OFFICERS
5.1 OFFICERS
17
5.2 ELECTION OF OFFICERS
17
5.3 SUBORDINATE OFFICERS
17
5.4 REMOVAL AND RESIGNATION OF OFFICERS
17
5.5 VACANCIES IN OFFICES
18
5.6 CHAIRMAN OF THE BOARD
18
5.7 PRESIDENT
18
5.8 VICE PRESIDENTS
18
5.9 SECRETARY
18
5.10 CHIEF FINANCIAL OFFICER
19
 
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
19
6.2 INDEMNIFICATION OF OTHERS
20
6.3 PAYMENT OF EXPENSES IN ADVANCE
20
6.4 INDEMNITY NOT EXCLUSIVE
20
6.5 INSURANCE INDEMNIFICATION
20
6.6 CONFLICTS
21
 
ARTICLE VII
RECORDS AND REPORTS
 
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
21
7.2 MAINTENANCE AND INSPECTION OF BY-LAWS
22
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
22
7.4 INSPECTION BY DIRECTORS
22
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
23
7.6 FINANCIAL STATEMENTS
23
 
3

ARTICLE VIII
GENERAL MATTERS
 
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
24
8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS
24
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
24
8.4 CERTIFICATES FOR SHARES
25
8.5 LOST CERTIFICATES
25
8.6 CONSTRUCTION AND DEFINITIONS
25
 
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
26
9.2 AMENDMENT BY DIRECTORS
26

 
4


BY-LAWS

OF

TRIMBLE NAVIGATION LIMITED
(amended and restated through July 20, 2006)


ARTICLE I

CORPORATE OFFICES

1.1 PRINCIPAL OFFICE .

The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state, and the corporation has one or more business offices in such state, the board of directors shall fix and designate a principal business office in the State of California.

1.2 OTHER OFFICES .

The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business.


ARTICLE II

MEETINGS OF SHAREHOLDERS

2.1 PLACE OF MEETINGS .
 
Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders’ meetings shall be held at the principal executive office of the corporation.

2.2 ANNUAL MEETING .

The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the fourth Thursday of April in each year at 4:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted.
5


2.3 SPECIAL MEETING .

A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting.

If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic, electronic, or facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these by-laws, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held.

2.4 NOTICE OF SHAREHOLDERS' MEETINGS .
 
All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election.

If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall also state the general nature of that proposal.

6

 
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE .
 
Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic, electronic transmission, or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic, electronic transmission, or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram, electronic transmission, or other means of written communication.

If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice.

An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice.

2.6 QUORUM .

The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

         2.7 ADJOURNED MEETING; NOTICE .

Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.6 of these by-laws.
 
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these by-laws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting.

7

2.8 VOTING .

The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these by-laws, subject to the provisions of Sections 702 to 704, inclusive, of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership).

The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun.

On any matter other than the election of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote.

If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly-held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number, or voting by classes, is required by the Code or by the articles of incorporation.

At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e. cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates placed in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected.

8


2.9 VALIDATION OF MEETINGS: WAIVER OF NOTICE; CONSENT .

The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these by-laws, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of a matter not included in the notice of the meeting, if that objection is expressly made at the meeting.

2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING .

Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted.

In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors.

All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary.

9

If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given in the manner specified in Section 2.5 of these by-laws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent", pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval.

2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS .
 
For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code.

If the board of directors does not so fix a record date:

(a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and

(b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given or (ii) when prior action by the board has been taken, shall be the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later.

The record date for any other purpose shall be as provided in Article VIII of these by-laws.

          2.12 PROXIES .

Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic, electronic transmission or otherwise) by the shareholder or the shareholder’s attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code.

10

2.13 INSPECTORS OF ELECTION .
 
Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy.

Such inspectors shall:

(a) Determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies;
         (b) Receive votes, ballots or consents;
         (c)  Hear and determine all challenges and questions in any way arising in connection with the right to vote;
         (d) Count and tabulate all votes or consents;
         (e) Determine when the polls shall close;
         (f)  Determine the result; and
         (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.

11

 
ARTICLE III

DIRECTORS

3.1 POWERS .
 
Subject to the provisions of the Code and any limitations in the articles of incorporation and these by-laws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.

        3.2 NUMBER AND QUALIFICATION OF DIRECTORS .

The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number or the minimum number of directors to a number less than nine (9) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1).

3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.

Directors shall be elected at each annual meeting of shareholders to hold office until the next such annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.

3.4 VACANCIES .
 
Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the outstanding shares entitled to vote thereon represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.

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A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting.

The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon.

Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective.

No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires.


3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
 
Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation.

Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting.

          3.6 REGULAR MEETINGS .

Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors.
 
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3.7 SPECIAL MEETINGS .

Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors.

Notice of the time and place of special meetings shall be delivered personally or by telephone, including a voice messaging system, or by electronic transmission, to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director s address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally, or by telephone, electronic transmission or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation.

         3.8 QUORUM .
 
A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these by-laws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees) and Section 317(e) of the Code (as to indemnification of directors).

        A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.

        3.9 WAIVER OF NOTICE .
     
       The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director.

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3.10 ADJOURNMENT .
 
A majority of the directors present, whether or not constituting a quorum may adjourn any meeting to another time and place.

3.11 NOTICE OF ADJOURNMENT .
 
Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.7 of these by-laws, to the directors who were not present at the time of the adjournment.

3.12 ACTION WITHOUT MEETING .

Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board.

3.13   FEES AND COMPENSATION OF DIRECTORS .

Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services.

3.14 APPROVAL OF LOANS TO OFFICERS .

The board of directors is authorized, without further shareholder approval, to approve loans from this corporation to officers of this corporation for the purpose of assisting in the acquisition of their primary residence in exceptional housing markets where such location is for the benefit of this corporation; provided that such loans are secured by such real prop