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

FOR THE QUARTERLY PERIOD ENDED March 31, 2007
                                                                                          FOR THE QUARTERLY PERIOD ENDED December 31, 2007

OR
                                                                                                                                          OR

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

                                             FOR THE TRANSITION PERIOD FROM________________ TO ______________
 FOR THE TRANSITION PERIOD FROM________________ TO ______________

Commission File number 1-10799

ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

OKLAHOMA
73-1351610
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)


1221 E. Houston
Broken Arrow, Oklahoma 74012
(Address of principal executive office)
(918) 251-9121
(Registrant's telephone number, including area code)


Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceedingpreceding 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  o
 
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 Rule12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer   o                                                                             Accelerated Filer   o                                                                     Non-accelerated filer   x
 
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-2 of the Exchange Act).
              Yes o    No  x
  
Shares outstanding of the issuer's $.01 par value common stock as of April 27, 2007January 31, 2008 were 10,233,756.10,250,656.
 


ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For the Period Ended MarchDecember 31, 2007


 
PART I.    FINANCIAL INFORMATION
  Page
Item 1.
Financial Statements.
Consolidated Balance Sheets3
    December 31, 2007 (unaudited) and September 30, 2007 (audited)
Consolidated Statements of Income and Comprehensive Income (unaudited)  5
    Three Months Ended December 31, 2007 and 2006
   
 
Consolidated Balance SheetsStatements of Cash Flows (unaudited)
  6
 March    Three Months Ended December 31, 2007 (unaudited) and September 30, 2006 (audited)
3
   
 
Consolidated Statements of Income and Comprehensive Income (unaudited)
  Notes to unaudited consolidated financial statements		 
Three Months Ended March 31, 2007 and 2006
5
7
   
ConsolidatedStatements of Cash Flows (unaudited)
Six Months Ended March 31, 2007 and 2006
6
Notes to unaudited consolidated financial statements.
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
10
  9
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
15
  11
   
Item 4.
4T.
Controls and Procedures.
15
  11
   
 
PART II - OTHER INFORMATION
   
Item 4.
6.
Submission of Matters to Vote of Security Holders.
Exhibits.		  15
Item 6.
Exhibits.
16
12
   
 
SIGNATURES
17
  13










2

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   March 31,   September 30, 
   2007  2006 
   (Unaudited)   (Audited) 
Assets
       
Current assets:       
Cash $235,399 $98,898 
Accounts receivable, net allowance of
$128,000 and $554,000, respectively
  
8,057,698
  
5,318,127
 
Income Tax Receivable  -  307,299 
Inventories, net of allowance for excess and obsolete
inventory of $1,361,000 and $1,178,000, respectively
  30,795,004  
28,990,696
 
Deferred income taxes  974,000  1,074,000 
Total current assets  40,062,101  35,789,020 
Property and equipment, at cost:       
Machinery and equipment  3,103,943  2,697,476 
Land and buildings  4,982,760  1,668,511 
Leasehold improvements  205,797  205,797 
   8,292,500  4,571,784 
Less accumulated depreciation and amortization  (2,176,131) (2,033,679)
Net property and equipment  6,116,369  2,538,105 
        
Other assets:       
Deferred income taxes  710,000  702,000 
Goodwill  1,592,039  1,560,183 
Other assets  217,793  335,566 
Total other assets  2,519,832  2,597,749 
        
Total assets
 $48,698,302 $40,924,874 






ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS



  December 31,  September 30, 
  2007  2007 
  (Unaudited)  (Audited) 
Assets      
Current assets:      
Cash $341,553  $60,993 
Accounts receivable, net allowance of
$304,000 and $261,000, respectively
   6,158,026    6,709,879 
   Income Tax Receivable  -   153,252 
Inventories, net of allowance for excess and obsolete
       inventory of $758,000 and $697,000, respectively
   33,904,207    31,464,527 
   Deferred income taxes  843,000   678,000 
Total current assets  41,246,786   39,066,651 
Property and equipment, at cost:        
Machinery and equipment  3,162,333   3,144,927 
Land and buildings  7,009,285   6,488,731 
   Leasehold improvements  205,797   205,797 
   10,377,415   9,839,455 
   Less accumulated depreciation and amortization  (2,429,509)   (2,341,431) 
Net property and equipment  7,947,906   7,498,024 
         
Other assets:        
Deferred income taxes  638,000   679,000 
Goodwill  1,560,183   1,560,183 
   Other assets  142,626   204,843 
Total other assets  2,340,809   2,444,026 
         
Total assets $51,535,501  $49,008,701 
         
See notes to unaudited consolidated financial statements.

3

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS




   December 31,  September 30, 
            2007,      2007 
    (Unaudited)     (Audited) 
Liabilities and Stockholders’ Equity       
Current liabilities:       
Accounts payable $5,039,747  $4,301,672 
Accrued expenses  1,071,230   1,331,890 
Income taxes payable  804,612   - 
Bank revolving line of credit  1,838,497   1,735,405 
Notes payable – current portion  1,858,298   1,427,693 
Dividends payable  -   210,000 
Total current liabilities  10,612,384   9,006,660 
         
Notes payable  17,258,365   5,845,689 
Other liabilities  215,986   - 
 
Stockholders’ equity:
        
Preferred stock, 5,000,000 shares authorized,        
$1.00 par value, at stated value:        
Series B, 7% cumulative; 300,000 shares issued and        
outstanding with a stated value of $40 per share  -   12,000,000 
Common stock, $.01 par value; 30,000,000 shares        
authorized;  10,271,756 and 10,270,756 shares issued,
 respectively
   102,718    102,708 
Paid-in capital  (6,380,457)   (6,383,574) 
Retained earnings  29,913,655   28,454,024 
Accumulated other comprehensive income:        
Unrealized (loss) gain on interest rate swap, net of tax  (132,986)   37,358 
   23,502,930   34,210,516 
         
Less:  Treasury stock, 21,100 shares at cost  (54,164)   (54,164) 
Total stockholders’ equity  23,448,766   34,156,352 
         
Total liabilities and stockholders’ equity $51,535,501  $49,008,701 

See notes to unaudited consolidated financial statements.

 
3

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS

   March 31,   September 30, 
   2007,  2006 
   (Unaudited)   (Audited) 
Liabilities and Stockholders’ Equity
       
Current liabilities:       
Accounts payable $4,382,970 $2,618,490 
Accrued expenses  911,668  1,181,139 
Income taxes payable  371,468  - 
Bank revolving line of credit  4,283,781  3,476,622 
Notes payable - current portion  1,426,013  1,241,348 
Dividends payable  210,000  210,000 
Total current liabilities  11,585,900  8,727,599 
        
Notes payable  6,560,291  4,666,738 
 
Stockholders’ equity:
       
Preferred stock, 5,000,000 shares authorized,       
$1.00 par value, at stated value:       
Series B, 7% cumulative; 300,000 shares issued and       
outstanding with a stated value of $40 per share  12,000,000  12,000,000 
Common stock, $.01 par value; 30,000,000 shares       
authorized; 10,254,856 and 10,095,897 shares issued, respectively  102,549  
102,528
 
Paid-in capital  (6,417,392) (6,474,018)
Retained earnings  24,853,218  21,863,685 
Accumulated other comprehensive income:      
Unrealized gain on interest rate swap, net of tax  67,900  92,506 
   30,606,275  27,584,701 
        
Less: Treasury stock, 21,100 shares at cost  (54,164) (54,164)
Total stockholders’ equity
  30,552,111  27,530,537 
        
Total liabilities and stockholders’ equity
 $48,698,302 $40,924,874 










See notes to unaudited consolidated financial statements.

4

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)

 Three Months Ended March 31, Six Months Ended March 31,
   2007  2006  2007  2006 
Net sales income $14,821,509 $11,198,570 $28,288,423 $24,739,519 
Net service income  1,219,042  1,220,587  2,500,645  2,433,249 
Total income
  16,040,551  12,419,157  30,789,068  27,172,768 
              
Costs of sales  9,962,366  7,506,212  19,042,089  16,370,909 
Cost of service  856,174  965,145  1,845,811  1,931,518 
Gross profit  5,222,011  3,947,800  9,901,168  8,870,341 
Operating, selling, general and             
administrative expenses  2,117,396  2,114,240  3,957,048  4,096,641 
Depreciation and amortization  77,136  60,637  142,452  107,259 
Income from operations  3,027,479  1,772,923  5,801,668  4,666,441 
Interest expense 
  169,225  165,125  301,135  312,049 
Income before income taxes  2,858,254  1,607,798  5,500,533  4,354,392 
Provision for income taxes  1,087,000  531,000  2,091,000  1,536,000 
              
Net income
  1,771,254  1,076,798  3,409,533  2,818,392 
              
Other comprehensive income:             
Unrealized gain on interest rate swap (net of taxes)  (17,317) 24,744  (24,606) 38,350 
Comprehensive income $1,753,937 $1,101,542 $3,384,927 $2,856,742 
              
Net income $1,771,254 $1,076,798 $3,409,533 $2,818,392 
Preferred dividends  210,000  210,000  420,000  420,000 
Net income attributable
             
to common stockholders
 $1,561,254 $866,798 $2,989,533 $2,398,392 
              
Earnings per share:
             
Basic $0.15 $0.09 $0.29 $0.24 
Diluted $0.15 $0.09 $0.29 $0.24 
              
Shares used in per share calculation             
Basic  10,233,756  10,133,147  10,233,256  10,122,685 
Diluted  10,248,254  10,172,143  10,250,896  10,182,106 


  Three Months Ended December 31, 
  2007  2006 
Net new sales income $8,652,761  $10,238,872 
Net refurbished sales income  4,810,963   3,228,042 
Net service income  1,275,644   1,281,603 
Total net sales  14,739,368   14,748,517 
         
Total cost of sales  9,988,540   10,069,360 
Gross profit  4,750,828   4,679,157 
   Operating, selling, general and        
administrative expenses  2,015,694   1,875,471 
   Depreciation and amortization  38,748   29,497 
Income from operations  2,696,386   2,774,189 
Interest expense  146,275   131,910 
Income before income taxes  2,550,111   2,642,279 
   Provision for income taxes  957,000   1,004,000 
         
Net income  1,593,111   1,638,279 
         
Other comprehensive income:        
         
Unrealized (loss) on interest rate swap (net of  taxes)  (146,344)   (7,289) 
Comprehensive income $1,446,767  $1,630,990 
         
         
Net income $1,593,111  $1,638,279 
Preferred dividends  133,480   210,000 
Net income available        
to common stockholders $1,459,631  $1,428,279 
         
         
Earnings per share:        
Basic $0.14  $0.14 
Diluted $0.14  $0.14 
         
Shares used in per share calculation        
Basic  10,250,656   10,232,756 
Diluted  10,295,359   10,253,483 

See notes to unaudited consolidated financial statements.statements



5
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED(UNAUDITED)

 Six Months Ended March 31,  
Three Months Ended
December 31,
 
  2007  2006  2007  2006 
Cash Flows from Operating Activities
             
Net income $3,409,533 $2,818,392  $1,593,111  $1,638,279 
Adjustments to reconcile net income to net cash               
provided by operating activities:               
Depreciation and amortization  142,452  107,259   38,748   29,497 
Provision for losses on accounts receivable  17,470  -   43,000  4,000 
Provision for excess and obsolete inventory  194,124  -   91,000  75,000 
Deferred income tax (benefit)/provision  92,000  (131,000) 
Stock based compensation expense  54,187  88,537 
Deferred income tax benefit (124,000)   (46,000) 
Share based compensation expense  1,627   3,064 
Change in:               
Receivables  (2,449,742)  1,244,463   662,105   (1,222,034) 
Inventories  (1,998,432)  (1,271,528)   (2,530,680)   (91,557) 
Other assets  93,167  (37,321)  111,547  31,761 
Accounts payable  1,764,480  (3,023,988)  738,075  1,313,793 
Accrued expenses  101,997  (670,439)  543,952  126,705 
Net cash provided by (used in) operating activities  1,421,236  (875,625) 
Other Liabilities  45,642   - 
Net cash provided by operating activities 1,214,127  1,862,508 
               
Cash Flows from Investing Activities
               
Additions to machinery and equipment  (17,406)   (261,774) 
Additions of land and building  (3,250,000)  -   (520,554)   (3,250,000) 
Acquisition of business and certain assets  (166,951)  -   -   (166,951) 
Additions to machinery and equipment  (335,621)  (46,736) 
Net cash (used in) investing activities  (3,752,572)  (46,736)   (537,960)   (3,678,725) 
               
Cash Flows from Financing Activities
               
Net change under line of credit  807,159  1,477,233 
Net borrowings under bank revolving line of credit 103,092   (358,800) 
Proceeds from notes payable  2,760,291  -  12,000,000  2,760,000 
Repurchase of preferred stock  (12,000,000)   - 
Payments on notes payable  (682,073)  (619,395)   (156,719)   (325,451) 
Proceeds from stock options exercised  2,460  240,172  1,500  810 
Payments of preferred dividends  (420,000)  (420,000)   (343,480)   (210,000) 
Repurchase of preferred stock  -  - 
Net cash (use in) provided by financing activities  2,467,837  678,010 
Net cash (used in) provided by financing activities  (395,607)   1,866,559 
               
Net (decrease) increase in cash  136,501  (244,351) 
Net increase in cash 280,560  50,342 
               
Cash, beginning of period  98,898  449,219   60,993   98,898 
               
Cash, end of period $235,399 $204,868  $341,553  $149,240 
               
Supplemental Cash Flow Information
               
Cash paid for interest $270,160 $305,041  $34,705  $122,023 
Cash paid for income taxes $1,423,382 $1,717,500  $18,800  $251,000 

See notes to unaudited consolidated financial statements.

 
6





Notes to unaudited consolidated financial statements


Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  However, the information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading.  The consolidated financial statements as of September 30, 20062007 have been audited by an independent registered public accounting firm.  It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006.2007.

Reclassifications

Certain reclassifications have been made to the 2006fiscal 2007 financial statements to conform to the 2007fiscal 2008 presentation.

Note 2 - Description of Business

ADDvantage Technologies Group, Inc., through its subsidiaries Tulsat Corporation, ADDvantage Technologies Group of Nebraska, Inc., NCS Industries, Inc., ADDvantage Technologies Group of Missouri, Inc., (dba ComTech Services), ADDvantage Technologies Group of Texas, Tulsat -– Atlanta, LLC, Jones Broadband International, Inc., and Tulsat-Pennsylvania LLC (dba Broadband Remarketing International) (collectively, the "Company"), sells new and refurbished cable television equipment throughout North America and Latin America in addition to being a repair center for various cable companies.  The Company operates in one business segment and product sales consist of different types of equipment used in the cable television equipment industry (CATV).


7
Note 3 -– Earnings Per Share

Basic and diluted net earnings per share were computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."  Basic net earnings per share is computed by dividing net earnings available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options.  Diluted net earnings per share gives effect to all potentially dilutive common stock equivalents during a period.  In computing diluted net earnings per share, the average stock price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of stock options.


 Three Months Ended March 31, Six Months Ended March 31, Three Months Ended December 31, 
  2007  2006  2007  2006  2007  2006 
Basic EPS Computation:
                
                
Net income attributable to                
common stockholders $1,561,254 $866,798 $2,989,533 $2,398,392  $1,459,631  $1,428,279 
                  
Weighted average outstanding                 
common shares  10,233,756 10,133,147 10,233,256 10,122,685   10,250,656  10,232,756 
                  
Earnings per Share - Basic $0.15 $0.09 $0.29 $0.24 
Earnings per Share – Basic $0.14  $0.14 
        
                  
Diluted EPS Computation:
                  
                  
Net income attributable to                  
common stockholders $1,561,254 $866,798 $2,989,533 $2,398,392  $1,459,631  $1,428,279 
                  
Weighted average outstanding                 
common shares  10,233,756 10,133,147 10,233,256 10,122,685   10,250,656  10,232,756 
                  
Potentially dilutive securities
                  
Effect of dilutive stock options  14,498  38,996  17,640  59,421   44,703   20,727 
Weighted average shares outstanding
                  
- assuming dilution  10,248,254 10,172,143 10,250,896 10,182,106   10,295,359  10,253,483 
                  
Earnings per Share - Diluted $0.15 $0.09 $0.29 $0.24 
          
Earnings per Share – Diluted $0.14  $0.14 


87
Note 4 -– Line of Credit Stockholder Loans, and Notes Payable

On November 27, 2007 the Company executed the Fourth Amendment to Revolving Credit and Term Loan Agreement (“Fourth Amendment”) with its primary financial lender, Bank of Oklahoma. The Fourth Amendment renewed the $7.0 Million Revolving Line of Credit (“Line of Credit”) and extended the maturity date to November 30, 2010.  The Fourth Amendment also extended the maturity of and increased the $8.0 Million Term Loan Commitment to $16.3 million.
At MarchDecember 31, 2007, a $4.3$1.8 million balance was outstanding under a $7.0 million line of credit due November 30, 2007,2010, with interest payable monthly based on the prevailing 30-day LIBOR rate plus 2.0% (7.32%1.4% (6.03% at MarchDecember 31, 2007).  $2.7$5.2 million of the $7.0 million line of credit was available to the Company to borrow at MarchDecember 31, 2007.  Borrowings under the line of credit are limited to the lesser of $7.0 million or the sumnet balance of 80% of qualified accounts receivable andplus 50% of qualified inventory for working capital purposes.less any outstanding term note balances.  Among other financial covenants, the line of credit agreement provides that the Company’s net worthCompany must be greatermaintain a Fixed Change Ratio of Coverage (EBITDA to Total Fixed Charges) of not less than $15 million plus 50% of annual net income (with no deduction for net losses),1.25 to 1.0, determined quarterly.  The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles.

Cash receipts are applied from the Company’s lockbox account directly against the bank line of credit, and checks clearing the bank are funded from the line of credit.  The resulting overdraft balance, consisting of outstanding checks, was $1,392,785$0.6 million at MarchDecember 31, 2007 and is included in the bank revolving line of credit.
 
AnThe outstanding balance of the $8.0 million amortizing term noteTerm Loan prior to being amended on November 27, 2007 was obtained from$4.3 million. The $12.0 million of additional funds available under the Company's primary financial lenderamended $16.3 million Term Loan were fully advanced upon executing the Fourth Amendment and the proceeds were used to financeredeem all of the redemption of theissued and outstanding shares of the Company’s Series A ConvertibleB 7% Cumulative Preferred Stock at September 30, 2004.Stock. These shares of preferred stock were beneficially held by David E. Chymiak, Chairman of the Company, and Kenneth A. Chymiak, President and Chief Executive Officer of the Company, and his spouse. The outstanding balance on this note was $5.0$16.3 million at MarchDecember 31, 2007. The note is due on SeptemberNovember 30, 2009,2012, with monthly principalquarterly payments beginning the last business day of $100,000February 2008 of approximately $0.4 million plus accrued interest, and theinterest. The note bears interest at the prevailing 30-day LIBOR rate plus 2.50% (7.82%1.4% (6.03% as of MarchDecember 31, 2007). An
The Revolving Line of Credit and Term Loan Agreement also includes a Term Loan Commitment of $2.8 million. This loan was secured to finance the purchase of Company’s headquarters facility located in Broken Arrow, OK on November 20, 2006. The outstanding balance on this note was $2.6 million at December 31, 2007. The note is due on November 20, 2021, with monthly principal payments of $15,334 plus accrued interest.  Interest on the outstanding note balance accrues at the prevailing 30-day LIBOR rate plus 1.4% (6.03% at December 31, 2007).
The Company’s other note payable of $0.3 million, secured by real estate, is due in monthly payments through 2013 with interest at 5.5% through 2008, converting thereafter to prime minus .25%.

Note 5 – Derivative Financial Instruments
In 2004, the Company entered into an interest rate swap was entered into simultaneously with the note on September 30, 2004, which fixedto effectively fix the interest rate of the $8.0 million term note at 6.13%.  Upon entering into this interest rate swap, the Company designated this derivative as a cash flow hedge by documenting the Company’s risk management objective and strategy for undertaking the hedge along with methods for assessing the swap's effectiveness. At March 31,swap’s effectiveness in accordance with Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). The changes in the fair market value of this interest rate swap has been reflected in the other comprehensive income section of the Consolidated Statements of Income and Comprehensive Income and the fair value of the swap has been recorded on the Company’s Consolidated Balance Sheet.   On November 20, 2007 the Company terminated this swap agreement upon amending and extending the $8.0 million term note to $16.3 million.  The Company received approximately $22,000 upon termination of this agreement which represented the fair marketvalue of the swap on that date and recognized this gain as interest expense in the current period.
Additionally, on November 27, 2007, the Company entered into a new interest rate swap agreement to effectively fix the interest rate on the $16.3 million term note at 5.92%.  The notional value of the interest rate swap approximated its carryingamortizes quarterly with payments that mirror the $16.3 million term note. Upon entering into this interest rate swap, the Company designated this derivative as a cash flow hedge by documenting the Company’s risk management objective and strategy for undertaking the hedge along with methods for assessing the swap’s effectiveness in accordance with SFAS 133. The change in the fair market value of $108,900.this interest rate swap has been reflected in the other comprehensive income section of the Consolidated Statements of Income and Comprehensive Income and the fair value of the swap has been recorded on the Company’s Consolidated Balance Sheet. At December 31, 2007, the notional value of the swap was $16.3 million and the fair value of the interest rate swap was approximately $0.2 million, which is reflected in other liabilities on the Company’s Consolidated Balance Sheet.

Notes payable secured by real estate of $287,640 are due in monthly payments through 2013 with interest at 5.5% through 2008, converting thereafter to prime minus .25%.

On November 20, 2006 the Company purchased real estate consisting of an office and warehouse facility located on ten acres in Broken Arrow, OK from Chymiak Investments, LLC for $3,250,000. The office and warehouse facility is currently being utilized as the Company's headquarters and the office and warehouse of the Tulsat Corporation subsidiary. The office and warehouse facility contains approximately 100,000 square feet of gross building area and was recently renovated and modified for the specific use of the Company. The Company obtained a $2.7 million amortizing term loan on November 20, 2006, secured by the real estate purchased, to finance the purchase of the facility. The term loan matures over fifteen years and payments are due monthly, beginning December 31, 2006, at $15,334 plus accrued interest. Interest accrues at a calculated rate of 1.5% plus the prevailing 30-day LIBOR rate (6.82% at March 31, 2007).

Note 5 -6 – Stock Option Plans

The 1998 Incentive Stock Plan (the "Plan") provides for the award to officers, directors, key employees and consultants of stock options and restricted stock.  The Plan provides that upon any issuance of additional shares of common stock by the Company, other than pursuant to the Plan, the number of shares covered by the Plan will increase to an amount equal to 10% of the then outstanding shares of common stock.  Under the Plan, option prices will be set by the Board of Directors and may be greater than, equal to, or less than fair market value on the grant date.

At MarchDecember 31, 2007, 1,009,6521,024,656 shares of common stock were reserved for the exercise of stock awards under the 1998 Incentive Stock Plan.  Of the shares reserved for exercise of stock awards, 729,652744,656 shares were available for future grants.
 
A summary of the status of the Company's stock options for the sixthree months ended MarchDecember 31, 2007 is presented below.
 
b

 2007
 Wtd. Avg.
 SharesEx. Price
   
Outstanding at September 30, 2006105,750$3.99
Granted30,0003.45
Exercised(2,000)$1.23
Canceled0-
Outstanding at March 31, 2007133,750$3.91
   
Exercisable at March 31, 2007126,250$3.80

  2008 
  Wtd. Avg. 
  Shares  Ex. Price 
       
Outstanding at September 30, 2007  117,850  $4.20 
   Grantedju  -   - 
   Exercised  1,000   1.50 
   Canceled  -   - 
Outstanding at December 31, 2007  116,850  $4.22 
         
Exercisable at December 31, 2007  109,350  $4.11 

98

In the first quarter of fiscal year 2006, the Company adopted Statement of Financial Accounting Standards 123(R)No. 123 (revised 2004), “ShareShare Based Payment”Payment (“SFAS 123R”).  SFAS 123R requires all share-based payments to employees, including grants of employee stock options, be recognized as compensation costs in the financial statements based on their grant date fair value. The Company elected the modified-prospective transition method of adopting SFAS 123R which requires the fair value of unvested options be calculated and amortized as compensation expense over the remaining vesting period. SFAS 123R does not require the Company to restate prior periods for the value of vested options. Compensation expense for stock based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of income and comprehensive income.

The Company estimates the fair value of the options granted using the Black-Scholes option valuation model and the assumptions shown in the table below.  The Company estimates the expected term of options granted based on the historical grants and exercises of the Company’s options.  The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock, consistent with SFAS 123R and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB No. 107).  The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected term.  The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future.  Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.  The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards.   The Company uses historical data to estimate the pre-vesting option forfeitures and records share-based expense only for those awards that are expected to vest.  A summary of the Company's current estimates are presented below.

 

 SixThree Months Ended
 MarchDecember 31, 2007
Average expected life5.25.0
Average expected volatility factor25%
Average risk-free interest rate4.45%
Average expected dividend yield------

 

On March 6, 2007 the Company issued nonqualified stock options totaling 30,000 shares to directors and executives. All of the granted options were fully vested on their issue date. The Company used the Black Scholes pricing model to calculate the value of the options. The value of the options granted on March 6, 2007 totaled $48,060.

For the sixthree months ended MarchDecember 31, 2007, the Company recorded compensation expense of $54,187$1,627 representing the fair value of the vested options granted on March 6, 2007 and the amortizing fair value of the unvested options granted prior to fiscal 2007. As of MarchDecember 31, 2007, compensation costs related to unvested stock awards not yet recognized in the statements of operations totaled $16,275,$8,250 which will be recognized over the remaining threetwo year vesting term.

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

Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words "believe," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable television industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  Readers should carefully review the risk factors described under Item 1A of our Annual Report on Form 10-K filed for the year ended September 30, 20062007 and in other documents we file from time to time with the Securities and Exchange Commission.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of ADDvantage Technologies Group, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements ("Notes").

We are a Value Added Reseller ("VAR") for select Scientific-Atlanta and Motorola new products and we are a distributor for several other manufacturers of cable television ("CATV") equipment.  We also specialize in the sale of surplus new and refurbished previously-owned CATV equipment to CATV operators and other broadband communication companies.  It is through our development of these vendor relationships that we have focused our initiative to market our products and services to the larger cable multiple system operators ("MSOs") and Telecommunication Companiestelecommunication companies (“Telcoms”telcoms”).  These customers provide an array of different communications services as well as compete in their ability to offer subscribers ‘Triple Play’"triple play" transmission services, including data, voice and video.

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New Product OfferingResults of Operations

During the fourth quarter of fiscal 2006 we added digital converter boxes to our product offerings. The digital converter boxes we purchase and currently sell are considered legacy boxes as the security features are not separable from the boxes. We sold approximately 16,000 legacy converter boxes during the first six months of fiscal 2007, generating revenues of approximately $1.3 million, and are repairing and processing in excess of 80,000 additional legacy converter boxes. The inventory value of the boxes at March 31, 2007 totaled approximately $3.1 million and we expect to invest an additional approximate $1.6 million to repair and process the remaining legacy boxes in inventory.

There is currently an FCC ban on the sale of legacy digital converter boxes scheduled to go into effect on July 1, 2007. While we can not yet determine the final impact of the July 1, 2007 ban, we believe the ban has created an increased demand for our legacy boxes as our U.S. customers will want to build their inventory of these cost effective legacy boxes prior to the ban date. In addition, we expect there will continue to be a demand for our legacy boxes after the ban date, either in the U.S. if waivers are obtained or the FCC deadline is extended, or internationally where no ban exists and these boxes are widely used. There is risk that, after the July 1, 2007 FCC ban date, the normal attrition of legacy boxes in the U.S. market will produce a surplus supply that will drive down pricing in the international market. If this happens, our margins on digital converter box sales will be impacted. However, we expect the sales prices for the refurbished legacy digital boxes will remain above our investment costs.

Result of Operations

Comparison of Results of Operations for the Three Months Ended MarchDecember 31, 2007 and MarchDecember 31, 2006

Total Net Sales.  Total Net sales increased $3.6 million, or 29.2%, to $16.0 million forSales during the secondfirst quarter of fiscal 2007 from $12.42008 totaled $14.7 million, forwhich was consistent with $14.7 million Total Net Sales reported during the same periodfirst quarter of fiscal 2006.2007.  New equipment sales grew by $1.9declined $1.6 million, or 20%15.6%, to $11.4$8.7 million in the secondfirst quarter of fiscal 20072008 from $9.5$10.2 million in the secondfirst quarter of fiscal 2006.2007.  The majoritydecrease in new equipment sales was due primarily to a decline in the sales of this growth came from increasednew equipment to two large customers of approximately $1.0 million each.  The decline in sales to the three largest customers whosefirst customer was attributed to the postponement of its scheduled rebuilding projects, and the second customer’s reduced sales volumes were attributed to an overall decline in the volume of regional upgrades being performed during the period.  Net refurbished sales increased for the quarter by $0.9 million, $0.4 million and $0.7 million, respectively. Sales to these customers and other large MSOs increased over the same period last year as many customers are purchasing new equipment as part of large capital improvement projects to upgrade the bandwidth of their communication systems. Refurbished equipment sales increased $1.7$1.6 million, or 100%50%, to $3.4$4.8 million in the secondfirst quarter of fiscal 2007,2008 from $1.7$3.2 million for the same period last year.  Incremental sales from the introductionSales of refurbished digital converter boxes totaled $0.8increased approximately $1.3 million due to increased sales to domestic customers that received waivers from the FCC ban on the purchases of these boxes and sales to international customers, who are not subject to the increased second quarter sales.FCC ban.    The remaining increase in refurbished sales came from product saleswas primarily attributed to smaller cable customer that are expanding the size of their existing subscriber territory or performing upgrades from analoga customer's project to upgrade a service area with refurbished transmission equipment, which carries only basic video signals, to digital based equipment, that can transmit voice, data and video signals, using more cost effective refurbished products. Repair service revenue remained relatively consistent at $1.2generated incremental sales of $0.4 million for the secondquarter.  Net service income totaled $1.3 million for the first quarter of fiscal 2007 compared to $1.22008 which was consistent with the $1.3 million of revenue earned in the same periodfirst quarter of fiscal 2006.2007.
 
Costs of Sales. Sales.  Costs of sales includes (i) the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, (ii) the equipment costs used in repairs, (iii) the related transportation costs, and (iv) the labor and overhead directly related to theseequipment sales.  Costs of sales increased $2.3decreased $0.1 million or 27.1%, to $10.8$10.0 million in the secondfirst quarter of fiscal 20072008 from $8.5$10.1 million in the first quarter of fiscal 2007.  The decrease in costs of sales was attributable to the change in product line mix, as refurbished equipment generally involved a higher profit margin than new equipment.
Gross  Profit.  Gross Profit increased $0.1 million, or 2.1%, to $4.8 million in the first quarter of fiscal 2008 from $4.7 million for the same period in fiscal 2006. This increase was primarily due to the increased product sales for the period.

Gross Profit. Gross profit increased $1.3 million, or 33.3%, to $5.2 million in the second quarter of fiscal 2007 from $3.9 million for the same period in fiscal 2006.2007.  The increase in gross profit was a directthe result of the increase in sales for the quarter. Gross profit margins increased to 32.6% in the second quarter of fiscal 2007 from 31.8% in the second quarter of fiscal 2006. Gross profit margins improved due to the large increase in refurbished product sales, which products have higher margins as well as a change in product line mix sold during the mix of new products.quarter.
 
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Operating, Selling, General and Administrative Expenses.Operating, selling, general and administrative expenses include personnel costs (including fringe benefits, insurance and taxes), occupancy, communication and professional services, among other less significant cost categories.  Operating, selling, general and administrative expenses forincreased $0.1 million to $2.0 million in the secondfirst quarter of fiscal 2007 were $2.1 million which was consistent with the $2.12008 from $1.9 million reported in the same period of fiscal 2006. We recorded reduced bad debt expense of2007.   This increase was primarily driven by $0.1 million increase in payroll costs associated with new employees hired in the past 9 months due to our business growth.
Income from Operations.  Income from operations decreased $0.1 million, or 3.5%, to $2.7 million in the secondfirst quarter of fiscal 2007, due to reduced exposure, and reduced professional services of $0.1 million, associated with the change in accountants and recruitment of new chief financial officer in the second quarter of fiscal 2006. These reduced expenses were offset by the incremental payroll and other operating expenses of Tulsat-Pennsylvania, LLC (dba Broadband Remarketing International) and ComTech-Indiana, a division of ADDvantage Technologies Group of Missouri, Inc. Broadband Remarketing International (“BRI”), which began operations on June 30, 2006 and ComTech-Indiana, which began operations on October 10, 2006, incurred incremental operating expenses in the fiscal 2007 second quarter of $0.1 million and $0.1 million, respectively.

Income2008 from Operations. Income from operations increased $1.3 million, or 72.2%, to $3.0 million for the second quarter of fiscal 2007 from $1.8$2.8 million for the same period of fiscal 2006.2007.  Income from operations decreased primarily increased as athe result of the increase in sales and gross profit for the period.our increased payroll costs.

11
Interest Expense. In fiscal 2004,On November 27, 2007 we amended our $8.0 million term note with our primary financial lender to $16.3 million and extended the maturity of the amended note to November 30, 2012.  The outstanding balance of the $8.0 million term loan prior to the amendment was $4.3 million.  The $12.0 million of additional funds available under the amended $16.3 million term loan were fully advanced at closing and the proceeds were used to redeem all of the issued and outstanding shares of our Series B 7% Cumulative Preferred Stock.  The impact on income available to holders of common stock from the increased interest expense is expected to be fully offset by the elimination of dividends paid on the outstanding preferred shares.  On November 27, 2007, we entered into an interest rate swap agreement to effectively fix the interest rate of a $8.0on the new $16.3 million monthlyquarterly amortizing note of which $5.0 million remained outstanding as of March 31, 2007, at an interest rate of 6.13%5.92%.  Interest rates on the remaining debt instruments, which total approximately $7.3had outstanding principal balances totaling $4.7 million as of MarchDecember 31, 2007, fluctuatefluctuates periodically based on the specific criteria outlined in the corresponding debt agreements.  Interest expense for the secondfirst quarter of fiscal year 20072008 was $0.2 million, compared to $0.2or an increase of $0.1 million forover the same period last year. As$0.1 million of March 31, 2007interest expense reported in fiscal 2007.  The increased interest expense was associated with the line of credit balance was $4.3additional borrowings under the amended $16.3 million compared with $3.7 million as of March 31, 2006. The interest rate on the line of credit as of March 31, 2007 and 2006 was 7.32% and 6.83% respectively.term note.

Income Taxes.Taxes – The provision for income taxes for the secondfirst quarter of fiscal 20072008 was $1.1$1.0 million, or 38.0%37.5% of profit before taxes, compared to $0.5$1.0 million or 33.0%38.0% of profit before taxes for the same period last year.  Our estimated effective tax rate for 20072008 was increased asdecreased due to a slight decline in the estimated state income tax deductionrates for compensation expense from stock options exercised is expected to be minimal in 2007.2008.

Comparison of Results of Operations for the six months ended March 31, 2007 and March 31, 2006Recently issued Accounting Standards

Net Sales. In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Net sales increasedSFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by $3.6 million, or 13.2%,providing companies with the opportunity to $30.8 millionmitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. We plan to adopt SFAS No. 159 beginning in the six months ended March 31, 2007 from $27.2 million for the same period in fiscal 2006. New equipment sales grew by $1.4 million, or 6.9%, to $21.7 million for the six months ended March 31, 2007 from $20.3 million for the same period in fiscal 2006. The majority of this growth came from increased sales to our two largest customers totaling approximately $2.8 million. New product sales increased in 2007 as many customers have started capital improvements to upgrade the bandwidth of their communication signals. Sales of refurbished products grew $2.1 million, or 46.7%, to $6.6 million for the six months ended March 31, 2007 from $4.5 million for the same period fiscal 2006. Sales of refurbished products increased incrementally $1.5 million from the addition of the digital converter box product line introduced during the fourthfirst quarter of fiscal 2006. The remaining increase in refurbished product sales is attributable to several small regional cable providers purchasing increased quantities2009. We are evaluating the impact, if any, the adoption of more cost effective products to expand their subscriber base coverageSFAS No. 159 will have on our operating income or transition from analog transmission to digital to offer additional voice and data services. Repair service revenue remained relatively consistent, growing to $2.5 million for the first six months ended March 31, 2007 from $2.4 million or the same period in fiscal 2006. The additional service revenues generated came from the incremental business of ComTech-Indiana, which began operations on October 10, 2006.

We expect sales of new products to remain strong in the remaining six months of fiscal 2007 as several large MSOs continue their capital improvement projects to increase the bandwidth of their digital communication signals. Furthermore, we expect continued incremental growth from the sales of our legacy digital converter boxes in the U.S. through the end of the third quarter, after which the ban is scheduled to go into effect, and internationally through the end of the fiscal year, where no ban exists.

Costs of Sales. Costs of sales includes (i) the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, (ii) the equipment costs used in repairs, (iii) the related transportation costs, and (iv) the labor and overhead directly related to these sales. Costs of sales increased $2.6 million, or 14.2%, to $20.9 million for the six months ended March 31, 2007 from $18.3 million for the same period of fiscal 2006. Costs of sales as a percentage of net sales increased to 67.8% for the first six months of fiscal 2007 from 67.4% for the same period of fiscal 2006. The increase in cost of sales percentage in fiscal 2007 was primarily due to a $0.2 million increase in our obsolescence reserve made to offset potential future inventory writedowns.earnings.

Gross Profit. Gross profit increased $1.0 million, or 11.2%, to $9.9 million for the six months ended, March 31, 2007 from $8.9 million for the same period of fiscal 2006. The increased gross profit for fiscal 2007 was attributed to the increase in sales of new and refurbished products.
 
Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses include personnel costs (including fringe benefits, insurance and taxes), occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses decreased $0.1 million, or 2.4%, to $4.0 million for the six months ended March 31, 2007 from $4.1 million for the same period of fiscal 2006. This decrease was primarily attributed to bad debt expense, which was lower by $0.3 million in 2007, due to reduced risk exposure, lower professional services of $0.1 million recorded in 2007, due to the change of accountants and the recruitment of new chief financial officer in 2006. These lower expenses were offset by the incremental operating, selling, general and administrative expenses associated with the new BRI and Com-Tech Indiana operations. BRI, which began operations on June 30, 2006, and Com-Tech Indiana, which began operations on October 1, 2006, incurred incremental operating, selling, general and administrative expenses for the first six months of fiscal 2007 of $0.2 million and $0.1 million, respectively.

Income from Operations. Income from operations increased $1.1 million, or 23.4%, to $5.8 million for the six months ended March 31, 2007 from $4.7 million for the same period last year. Income from operations increased primarily due to increased new and refurbished product sales associated with customer bandwidth upgrades and the incremental sales related to the digital converter box product line.

Interest Expense. In fiscal 2004, we entered into an interest rate swap agreement to fix the interest rate of the $8.0 million monthly amortizing note, of which $5.0 million remained outstanding as of March 31, 2007, at an interest rate of 6.13%. Interest rates on the remaining debt instruments, which total approximately $7.3 million as of March 31, 2007, are determined based on the specific criteria of the corresponding debt agreements. Interest expense for the first six months of fiscal year 2007 was $0.3 million compared to $0.3 million for the same period last year. As of March 31, 2007 the line of credit balance was $4.3 million, compared with $3.7 million as of March 31, 2006. The interest rate on the line of credit as of March 31, 2007 and 2006 was 7.32% and 6.83% respectively.

Income Taxes. The provision for income taxes for the first six months of fiscal 2007 was $2.1 million, or 38.0% of profit before taxes, compared to $1.5 million, or 35.3% of profit before taxes for the same period last year. Our estimated effective tax rate for 2007 was increased as the tax deduction for compensation expense from stock options exercised is expected to be minimal in 2007.


12
Recently issued Accounting Standards
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements beingfrom both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. We adopted SAB No. 108 in the first quarter of fiscal year 2007 and its adoption had no impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us beginning October 1, 2008. We do not expect the adoption of SFAS No. 157 to have a material effect on our financial statements.

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In fiscal 2006, we elected early adoption of FIN No. 48 and there was no impact on our financial statements.

In June 2006, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on EITF issueIssue No. 06-2, "Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43." EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. We adopted EITF issueIssue No. 06-2 is effective for us beginning October 1, 2007. We do not expect theThe adoption of EITF Issue No. 06-2 todid not result in a material adjustmentimpact to ourthe financial statements.

 
Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 20062007 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.

General
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The most significant estimates and assumptions relate to the carrying value of our inventory and, to a lesser extent, the adequacy of our allowance for doubtful accounts.
 
13
Inventory Valuation
 
Inventory consists of new and used electronic components for the cable television industry.  Inventory is stated at the lower of cost or market.  Market is defined principally as net realizable value.  Cost is determined using the weighted average method.

We market our products primarily to MSOs and other users of cable television equipment who are seeking products (i) that can be shipped on a same-day basis, or seeking products(ii) of which manufacturers have discontinued production.  Our position in the industry requires us to carry large inventory quantities relative to quarterly sales, but also allows us to realize high overall gross profit margins on our sales.   Carrying these significant inventories represents our greatest risk.  For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs for sales we make in a reasonable period. Our investment in inventory is represented predominantly by new products purchased from manufacturers and surplus-new products, which are unused products purchased from other distributors or MSOs.

In order to address the risks associated with our investment in inventory, we regularly review inventory quantities on hand and reduce the carrying value by recording a provision for excess and obsolete inventory based primarily on inventory aging and forecasts of product demand and pricing.  The broadband industry is characterized by changing customer demands and changes in technology that could result in significant increases or decreases of inventory pricing or increases in excess or obsolete quantities on hand.  Our estimates of future product demand may prove to be inaccurate,inaccurate; in which case the provision required for excess and obsolete inventory may have been understated or overstated.  Although every effort is made to ensure the accuracy of internal forecasting, any significant changes in demand or prices could have a significant impact on the carrying value of our inventory and reported operating results.  As of MarchDecember 31, 2007 we have reduced inventories by maintaining an allowance for excess and obsolete inventories totaling $1.4approximately $0.8 million.

10
Accounts Receivable Valuation
 
Management judgments and estimates are made in connection with establishing the allowance for returns and doubtful accounts. Specifically, we analyze historical return volumes, the aging of accounts receivable balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  At MarchDecember 31, 2007, accounts receivable, net of allowance for returns and doubtful accounts of $0.1approximately $0.3 million, amounted to $8.1$6.2 million.

Liquidity and Capital Resources

We have a line of credit with the Bank of Oklahoma under which we are authorized to borrow up to $7.0 million at a borrowing rate based on the prevailing 30-day LIBOR rate plus 2.0% (7.32% at March 31, 2007.) This line of credit will provide the lesser of $7.0 million or the sum of 80% of qualified accounts receivable and 50% of qualified inventory in a revolving line of credit for working capital purposes. The line of credit is collateralized by inventory, accounts receivable, equipment and fixtures, and general intangibles and had an outstanding balance at March 31, 2007, of $4.3 million, due November 30, 2007. At March 31, 2007, $2.7 million of the $7.0 million line of credit remained unused and available.

An $8 million amortizing term note with Bank of Oklahoma was obtained to finance the redemption of the outstanding shares of our Series A Convertible Preferred Stock at September 30, 2004. The outstanding balance on this note was $5.0 million at March 31, 2007. The note is due on September 30, 2009, with monthly principal payments of $100,000 plus accrued interest, and the note bears interest at the prevailing 30-day LIBOR rate plus 2.50% (7.82% at March 31, 2007). An interest rate swap was entered into simultaneously with the note on September 30, 2004, which fixed the interest rate at 6.13%.

Notes payable secured by real estate of $287,640 are due in monthly payments through 2013 with interest at 5.5% through 2008, converting thereafter to prime minus .25%.

On November 20, 2006 we purchased real estate consisting of an office and warehouse facility located on ten acres in Broken Arrow, OK from Chymiak Investments, LLC for $3,250,000. The office and warehouse facility is currently being utilized as our headquarters and the office and warehouse of our Tulsat Corporation. The office and warehouse facility contains approximately 100,000 square feet of gross building area and was recently renovated and modified for the specific use of the Company. A $2,760,000 amortizing term note was executed on November 20, 2006 to finance the purchase of the new facility. The loan matures over fifteen years and payments are due monthly, beginning December 31, 2006, at $15,334 plus accrued interest. Interest accrues at a calculated rate of 1.5% plus the prevailing 30-day LIBOR rate (6.82% at March 31, 2007).

We finance our operations primarily through internally generated funds and thea bank line of credit.  Monthly paymentsDuring the first quarter of principal for notes payable and loans used to purchase buildings total $1.4fiscal 2008, we generated approximately $1.2 million in the next 12 months. We expect to fund these payments throughof cash flow from operations.operations including $0.4 million absorbed from changes in receivables, inventories, and other assets, accounts payable and accrued liabilities.
 

During the quarter, we invested approximately $0.5 million of our available cash flows towards the completion of two warehouse construction projects in Broken Arrow, Oklahoma and Sedalia, Missouri.  The new 62,500 square foot warehouse facility in Broken Arrow, Oklahoma is located at the back section of our 10 acre headquarters facility.  The completed warehouse addition, which cost approximately $1.6 million, was constructed to gain additional operating efficiencies by consolidating the operations and multiple outside warehouses of our Tulsat subsidiary into one facility.  The new 18,000 square foot warehouse facility in Sedalia, Missouri, which cost approximately $0.4 million, will expand the revenue generating capacity of this location as it increased the square footage of the operation by approximately 30% and allowed us to consolidate our Stockton, California warehouse into a more cost effective location.  The combined annual savings from vacated rental properties is expected to total approximately $0.2 million per year.
14During the quarter we also executed the Fourth Amendment to Revolving Credit and Term Loan Agreement with our primary financial lender, Bank of Oklahoma.  The Fourth Amendment renews the $7.0 Million Revolving Line of Credit (“Line of Credit”) and extends the maturity date to November 30, 2010.   The Fourth Amendment also extends the maturity of and increases the $8.0 Million Term Loan Commitment to $16.3 million.
The $7.0 Million Line of Credit will continue to be used to finance our working capital requirements.  The lesser of $7.0 million or the total of 80% of the qualified accounts receivable, plus 50% of qualified inventory, less the outstanding balances under of the term loans identified in the agreement, is available to us under the revolving credit facility.  The entire outstanding balance on the revolving credit facility is due on maturity.
The outstanding balance of the $8.0 million Term Loan prior to being amended was $4.3 million.  The $12.0 million of additional funds available under the amended $16.3 million Term Loan were fully advanced at closing and the proceeds were used to redeem all of the issued and outstanding shares of our Series B 7% Cumulative Preferred Stock.   These shares of preferred stock were beneficially held by David A. Chymiak, Chairman of the Company, and Kenneth A. Chymiak, President and Chief Executive Officer of the Company, and his spouse.  The $16.3 million Term Loan is payable over a 5 year period with quarterly payments beginning the last business day of February 2008 of approximately $0.4 million plus accrued interest.
The Revolving Line of Credit and Term Loan Agreement also includes a Term Loan Commitment of $2.8 million.  This loan was secured to finance the purchase of the Company’s headquarters facility located in Broken Arrow, Oklahoma on November 20, 2006. The $2.8 million Term Loan matures over 15 years and payments are due monthly at $15,334 plus accrued interest.
Also during the quarter we paid the scheduled accrued dividends of approximately $0.2 million and additional accrued dividends of approximately $0.1 million, representing the final dividends earned on the outstanding Series B 7% Cumulative Preferred Stock from October 1, 2007 to November 20, 2007, as well as other scheduled note payments totaling approximately $0.2 million.
We believe that cash flow from operations, existing cash balances and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital needs.


Item 3. 3A.   Quantitative and Qualitative Disclosures aboutAbout Market Risk.Risk.

The Company’sMarket risk represents the risk of loss that may impact our financial position, results of operations, or cash flow due to adverse changes in market prices, foreign currency exchange rates, and interest rates.  We maintain no material assets that are subject to market risk and attempt to limit our exposure to market rate risk foron material debts by entering into swap arrangements that effectively fix the interest rates.  In addition, the Company has limited market risk associated with foreign currency exchange rates as all sales and purchases are denominated in U.S. dollars.
We are exposed to market risk related to changes in interest rates relates primarily to itson our $7.0 million revolving line of credit and our $2.8 million term loan associated withnote.  Borrowings under these obligations bear interest at rates indexed to the November 20, 2006 building purchase. The30 day LIBOR rate, which exposes us to increased costs if interest rates associated with these debt agreements fluctuate with the LIBOR rate.rise.  At MarchDecember 31, 2007, the outstanding balancesborrowings subject to variable interest rate fluctuations totaled $7.0 million. Future changes$4.4 million, and was as high as $4.6 million and as low as $2.6 million at different times during the quarter.   A hypothetical 30% increase in interest rates could causethe published LIBOR rate, causing our borrowing costs to increase, or decrease.would not have a material impact on our financial results.  We do not expect the LIBOR rate to fluctuate more than 30% in the next twelve months.

The Company maintains no cash equivalents. However,In addition to these debts, we have a $16.3 million term note which also bears interest at a rate indexed to the Company30 day LIBOR rate.  To mitigate the market risk associated with the floating interest rate, we entered into an interest rate swap on September 30, 2004,November 27, 2007, in an amount equivalent to the $8$16.3 million notes payable in order to minimize interest rate risk.term note.   Although the note bears interest at the prevailing 30-day LIBOR rate plus 2.50%1.4%, the swap effectively fixed the interest rate at 6.13%5.92%.  The fair value of this derivative $108,900 at March 31, 2007, will increase or decrease based onopposite any future changes in interest rates.

The Company does business primarily in North America
Item 4T.  Controls and Latin America and sales and purchases are denominated in U.S. dollars. The Company purchased credit insurance for international accounts that show risk of payment. Sales to international customers that do not qualify for credit insurance are made on a pre-payment basis
Item 4. Controls and Procedures.Procedures.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the period covered by this report on Form 10-Q, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


PART II OTHER INFORMATION


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

The annual meeting of shareholders of the Company was held in Broken Arrow, Oklahoma at the Corporate Offices of ADDvantage Technologies Group, Inc. on March 6, 2007. At the meeting, the following directors were elected for one year terms (with the votes as indicated):

 
FOR
WITHHELD
Kenneth A. Chymiak9,638,350226,468
David E. Chymiak9,638,350226,468
Stephen J. Tyde9,654,200210,618
Freddie H. Gibson9,654,200210,618
Henry F. McCabe9,653,160211,658


The shareholders also approved the appointment of Hogan & Slovacek as the Company’s auditors for the 2007 fiscal year with 9,837,863 votes FOR, 18,525 votes AGAINST, and 8,430 votes ABSTAINING.





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PART II   OTHER INFORMATION




Item 6.  Exhibits
  
Exhibit No.Description
  
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
32.1Certification 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.
  
32.2Certification 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.





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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.


ADDVANTAGE TECHNOLOGIES GROUP, INC.
                                                                                                (Registrant)
(Registrant)


                                                                                                ______________________________
Date: May 15, 2007February 13, 2008                                                                                                                                                        Kenneth A. Chymiak,
                                                                                                President and Chief Executive Officer
                                                                                              (Principal Executive Officer)


                                                                                               ______________________________
Date: May 15, 2007February 13, 2008                                                                                                                                                         Daniel E. O’Keefe,O'Keefe
                                                                                             Chief Financial Officer
                                                                                      (Principal Financial Officer)



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Exhibit Index

The following documents are included as exhibits to this Form 10-Q:

Item 6. Exhibits
Exhibit No.Description
  
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
32.1Certification 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.
  
32.2Certification 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.