Introduction

The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled "Risk Factors" in Item 1A of Part II of this quarterly report. These and many other factors could affect our future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report.

Overview

We design and manufacture equipment that connects mobile users on land, at sea, or in-flight to satellite services that provide access to live satellite TV, telephone and/or high-speed Internet. We also produce a guidance and stabilization product line based on our proprietary fiber optic gyro (FOG) and digital compass technology, with products ranging from directional sensors and rate gyros to inertial measurement units and navigation systems.

Our mobile satellite business includes receive-only TracVision satellite TV systems and 2-way TracPhone satellite communications systems. Our TracVision mobile satellite TV systems enable mobile reception in vehicles or vessels of most leading satellite TV services, such as DIRECTV, DISH Network, and ExpressVu in North America, and Astra and Eutelsat in Europe. In February 2008, we entered the aviation market with a development and production contract for a satellite TV antenna that will be sold on an OEM basis. Our TracPhone satellite communications systems enable reception of Inmarsat L-Band MSS services or our own mini-VSAT Broadband Ku-band FSS service, and are sold primarily to mariners. We sell our mobile satellite products through our direct sales force and an extensive international network of independent sales representatives, distributors and retailers to leisure, commercial, and government customers.

Our guidance and stabilization products use our precision FOG and digital compass technologies to help stabilize platforms such as antennas, gun turrets, optical systems, material handling equipment, and radar units and to provide guidance for torpedoes and other munitions. These products are either integrated within our own navigation and antenna systems or sold as modules to other manufacturers. We also use our FOG digital compass technology to produce some variants of our TACNAV line of navigation systems for military vehicles. We sell our guidance and stabilization products to commercial and military customers either directly to U.S. and allied governments and government contractors or through an international network of authorized independent sales representatives.

We generate sales primarily from the sale of our mobile satellite systems and services and our guidance and stabilization products and services. The following table provides, for the periods indicated, our sales by industry category:

                                                  Three months ended                   Nine months ended
                                             September 30, (in thousands)         September 30, (in thousands)
                                               2008               2007              2008               2007
Mobile communications                     $        12,269    $        13,039   $        48,599    $        46,592
Guidance and stabilization                          3,471              4,527            12,589             14,619

Sales                                     $        15,740    $        17,566   $        61,188    $        61,211

Our mobile communications service sales include sales earned from product repairs, sales from satellite telephone and Internet usage services, and certain DIRECTV and DISH Network account referral fees earned in conjunction with the sale of our products. We provide, for a fee, third-party satellite telephone and Internet airtime to our TracPhone and Internet customers who choose to activate their subscriptions with us. We also earn service sales from Broadband Internet and VOIP service sold with our mini-VSAT product. Under current DIRECTV and DISH Network programs, we are eligible to receive a one-time subsidy for each receiver activated and a new mobile account activation fee from DIRECTV and DISH Network for each customer who activates their DIRECTV or DISH Network service directly through us. Our guidance and stabilization service sales include product repairs and engineering services provided under development contracts.

Our guidance and stabilization business is characterized by a small number of customers who place a small number of relatively large dollar value orders. Orders for our guidance and stabilization products typically vary in size and are sometimes in the range of several hundred thousand dollars to over one million dollars. Each order can have a significant impact on our sales, and because our guidance and stabilization products generally have higher gross margins than our mobile communications products, each order can have an impact on our net income that is disproportionately large relative to the sales generated by the order.

We have historically derived a substantial portion of our sales from sales to customers located outside the United States. Note 9 of the notes to the condensed consolidated financial statements provides information regarding our sales to specific geographic regions.

Critical Accounting Policies

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 and liabilities, sales and expenses, and related disclosure at the date of our financial statements. Our significant accounting policies are summarized in note 1 of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007.

As described in our Form 10-K for the year ended December 31, 2007, our most critical accounting policies and estimates upon which our consolidated financial statements were prepared were those relating to revenue recognition, allowances for accounts receivable, inventories, income taxes and warranty. We have reviewed our policies and determined that these remain our most critical accounting policies for the quarter ended September 30, 2008. Readers should refer to our 2007 Form 10-K for the detailed descriptions of these policies.

Results of Operations

The following table provides, for the periods indicated, certain financial data
expressed as a percentage of sales:



                                         Three months ended         Nine months ended
                                           September 30,              September 30,
                                        2008           2007          2008         2007
   Sales:
   Product                                78.3 %         87.3 %        86.2 %      90.5 %
   Service                                21.7           12.7          13.8         9.5

   Total sales                           100.0          100.0         100.0       100.0

   Cost and expenses:
   Cost of product sales                  48.9           54.5          51.9        55.5
   Cost of service sales                  10.0            5.7           6.4         4.6
   Sales, marketing and support           22.7           20.1          19.3        18.5
   Research and development               11.5           12.9           9.5        11.4
   General and administrative             12.6           11.2           8.6        10.0

   Total costs and expenses              105.7          104.4          95.7       100.0

   Income (loss) from operations          (5.7 )         (4.4 )         4.3         0.0
   Interest income                         1.8            4.0           1.7         3.4
   Interest expense                        0.2            0.3           0.2         0.2
   Other income (expense), net            (0.3 )          0.2          (0.4 )      (0.0 )

   Income (loss) before income taxes      (4.4 )         (0.5 )         5.4         3.2
   Income tax expense (benefit)            0.7           (0.4 )         0.9         0.7

   Net income (loss)                      (5.1 )%        (0.1 )%        4.5 %       2.5 %

Three Months Ended September 30, 2008 and 2007

Sales

Product sales for the three months ended September 30, 2008 decreased $3.0 million, or 20%, to $12.3 million from $15.3 million for the three months ended September 30, 2007. The primary reason for the decrease was a decrease in sales of our land mobile products

of $2.6 million, or 62%, driven by decreased recreational vehicle sales, resulting from increased fuel prices and challenging consumer credit markets. Partially offsetting the decrease was an increase in sales of our marine products of $0.7 million, or 9%, driven primarily by demand for our TracPhone V7 product that we launched in the fourth quarter of 2007 and to a lesser extent, sales of Inmarsat-compatible TracPhone products. Mobile communications product sales originating from our Danish subsidiary increased $0.5 million, or 19%, from the three months ended September 30, 2007 to the three months ended September 30, 2008. Contributing to the sales increase were favorable currency rate fluctuations between the Euro and the U.S. dollar. Mobile communications product sales originating from North America decreased $2.4 million, or 27%, from the three months ended September 30, 2007 to the three months ended September 30, 2008.

Sales of our guidance and stabilization products decreased by $1.1 million, or 28%, from the three months ended September 30, 2007 to the three months ended September 30, 2008. Specifically, sales of our FOG products decreased $1.3 million, or 60%, driven largely by decreased sales in support of the U.S. Navy's MK54 torpedo program, and to a lesser extent decreased sales in support of defense-related remotely operated weapons station program. Partially offsetting the decrease was a $0.3 million increase in sales related to our TACNAV defense and legacy navigation products.

Service sales for the three months ended September 30, 2008 increased $1.2 million, or 53%, to $3.4 million from $2.2 million for the three months ended September 30, 2007. The primary reason for the increase was an increase in airtime service sales, specifically in relation to our mini-VSAT Broadband service that we launched in the fourth quarter of 2007.

Cost of Sales

For the three months ended September 30, 2008, cost of sales decreased $1.3 million, or 12%, to $9.3 million from $10.6 million for the three months ended September 30, 2007. On a percentage basis, the 20% decrease in our cost of product sales was consistent with the decrease in product sales from the three-month period ended September 30, 2007 to the three-month period ended September 30, 2008. Partially offsetting the decrease in cost of product sales was a 56% or $0.6 million increase in our cost of service sales for the three months ended September 30, 2008. This increase was driven largely by an increase in airtime service sales, specifically in relation to our mini-VSAT Broadband service that we launched in the fourth quarter of 2007.

Gross margin for the three months ended September 30, 2008 increased from the year-ago period by 1% to 41% from 40%. The primary reason for the increase in gross margin was the overall increase in product sales of our marine products and a 53% increase in our relatively higher margin service sales during the three-month period ended September 30, 2008. Partially offsetting the effect of these changes was a 28% decrease in our relatively higher margin guidance and stabilization product sales for the three-month period ended September 30, 2008. Given that we expect continued under-utilization of production capacity due to weak economic conditions, a continuing buildup of FOG production capacity that will be required to fulfill orders for defense-related remotely operated weapon stations and additional costs related to the build out of the network infrastructure to support our mini-VSAT Broadband service, we expect the gross margin percentage will decline from the third quarter levels in the upcoming fourth quarter.

Operating Expenses

Sales, marketing and support expense was approximately $3.5 million for the three months ended September 30, 2008 and September 30, 2007. As a percentage of sales, sales, marketing and support expense increased during the quarter ended September 30, 2008 to 23% from 20% for the quarter ended September 30, 2007. The increase as a percentage of sales is primarily the result of the decrease in overall product sales discussed above. We anticipate that, for the fourth quarter of 2008, sales, marketing and support expenses should be higher than the third quarter levels, primarily due to our continued effort to expand the sales channel and customer support in relation to our initiative for global expansion of our mini-VSAT Broadband satellite communication service.

Research and development expense for the three months ended September 30, 2008 decreased by $0.5 million, or 22%, to $1.8 million from $2.3 million for the three months ended September 30, 2007. As a percentage of sales, research and development expense decreased during the quarter ended September 30, 2008 to 12% from 13% for the quarter ended September 30, 2007. The primary reason for the decrease in 2008 was the capitalization of approximately $1.0 million of aviation antenna development costs (see note 13 to the condensed consolidated financial statements) during the third quarter of 2008, partially offset by increased spending related to our initiative for the global expansion of our mini-VSAT Broadband satellite communication service. Our overall spending in 2008 continues to be focused on sustaining our existing product base and advancing new products. We anticipate that, for the fourth quarter of 2008, research and development expenses will be higher than the third quarter levels, primarily due to a reduction in scale of the resources in support of the development of the aviation antenna as it nears production readiness, and increases for other new product initiatives.

General and administrative expense was flat with the year-ago period at approximately $2.0 million. However, for the three months ended September 30, 2008, general and administrative related employee compensation increased $0.4 million primarily as a result of an increase in accrued performance based incentive compensation. Offsetting the increase was a $0.4 million reduction in legal expense due to our August 2007 favorable judgment in the U.S. District Court for the District of Minnesota in relation to a patent

infringement lawsuit. As a percentage of sales, general and administrative expense increased during the quarter ended September 30, 2008 to 13% from 11% for the quarter ended September 30, 2007. The increase as a percentage of sales is primarily the result of the decrease in overall sales discussed above. We anticipate that, for the fourth quarter of 2008, general and administrative expenses will be lower than third quarter levels.

Interest and Other Income

Interest and other income for the three months ended September 30, 2008 decreased by $0.5 million to $0.2 million from $0.7 million for the three months ended September 30, 2007. The primary reason for the decrease is a $0.4 million decrease in interest income in the 2008 period resulting from lower interest rates and a slightly lower average amount of cash, cash equivalents and marketable securities invested during the three months ended September 30, 2008.

Income Taxes

Income tax expense for the three months ended September 30, 2008 increased by $0.2 million to $0.1 million from a tax benefit of $0.1 million for the three months ended September 30, 2007. The primary reason for the increase in 2008 was an increase of $0.4 million in pre-tax income from our Danish subsidiary. Also contributing to the increase was a $0.1 million federal income tax benefit recorded in 2007 to reconcile our federal income tax expense to our 2006 federal income tax return, which was completed and filed in September 2007. We expect that substantially all of our 2008 taxable income generated from our U.S. operations will be offset by federal net operating losses generated by us in prior years. Accordingly, we expect that any tax expense generated by our U.S. operations in 2008 will be made up primarily of federal alternative minimum tax and to a lesser extent certain state tax expense. Taxable income generated by our subsidiary in Denmark will be subject to taxation at the Danish statutory rates as we have no net operating loss carry-forwards or tax credits available to offset current or future taxable income in that jurisdiction. We regularly evaluate our valuation allowance recorded against our net deferred tax assets. Should we generate net income in 2008 and project net income for 2009 and beyond, we may determine, after considering all available evidence, that it is more likely than not that all or some additional portion of our net deferred tax assets would be realized. Should that determination be made, we would reverse all or a portion of our deferred tax assets valuation allowance at such time and recognize a reduction of income tax expense (as of September 30, 2008, the amount of reduction which could impact income tax expense totaled approximately $1.7 million). In addition, as a portion of our deferred tax assets were generated from excess tax deductions from share-based payment awards, pursuant to SFAS No. 123(R), a portion of any such valuation allowance reversal would be recorded to additional paid-in capital when the deduction reduces tax payable (as of September 30, 2008, such amount would total approximately $1.9 million).

Nine Months Ended September 30, 2008 and 2007

Sales

Product sales for the nine months ended September 30, 2008 decreased $2.6 million, or 5%, to $52.8 million from $55.4 million for the nine months ended September 30, 2007. The primary reason for the decrease was a decrease in sales of our land mobile products of $5.2 million, or 37%, driven by decreased recreational vehicle sales, resulting from increased fuel prices and challenging consumer credit markets. Largely offsetting the decrease was an increase in sales of our marine products of $5.1 million, or 18%, driven primarily by demand for our TracPhone V7 product that we launched in the fourth quarter of 2007 and to a lesser extent sales of Inmarsat-compatible TracPhone products. Mobile communications product sales originating from our Danish subsidiary increased $2.8 million, or 24%, from the nine months ended September 30, 2007 to the nine months ended September 30, 2008. Contributing to the sales increase were favorable currency rate fluctuations between the Euro and the U.S. dollar. Mobile communications product sales originating from North America decreased $2.9 million, or 9%, from the nine months ended September 30, 2007 to the nine months ended September 30, 2008.

Sales of our guidance and stabilization products decreased $2.5 million, or 20%, from the nine months ended September 30, 2007 to the nine months ended September 30, 2008. Specifically, sales of our FOG products decreased $2.9 million, or 38%, driven largely by decreased sales in support of defense-related remotely operated weapons station program and to a lesser extent decreased sales in support of the U.S. Navy's MK54 torpedo program. Partially offsetting the decrease was a $0.3 million increase in sales related to our TACNAV defense and legacy navigation products.

Service sales for the nine months ended September 30, 2008 increased $2.6 million, or 45%, to $8.4 million from $5.8 million for the nine months ended September 30, 2007. The primary reason for the increase was an increase in airtime service sales, specifically in relation to our mini-VSAT Broadband service that we launched in the fourth quarter of 2007. Also contributing to the increase was an increase in commission payments from DIRECTV for television receiver activations, $0.2 million of which were billed and paid during the second quarter that related to certain prior period activations, as well as an increase in service repair sales.

Cost of Sales

For the nine months ended September 30, 2008, cost of sales decreased $1.2 million, or 3%, to $35.6 million from $36.8 million for the nine months ended September 30, 2007. On a percentage basis, the 6% decrease in our cost of product sales was consistent with

the decrease in product sales from the nine months ended September 30, 2007 to the nine months ended September 30, 2008. Partially offsetting the decrease in cost of product sales was a 39% or $1.1 million increase in our cost of service sales for the nine months ended September 30, 2008. This increase was driven largely by an increase in airtime service sales, specifically in relation to our mini-VSAT Broadband service that we launched in the fourth quarter of 2007.

Gross margin for the nine months ended September 30, 2008 was 42% compared to 40% for the nine months ended September 30, 2007. The primary reason for the increase in gross margin was the overall increase in marine product sales discussed above, partially offset by an overall decrease in product sales of our relatively higher margin guidance and stabilization products for the nine months end September 30, 2008. Also contributing to the increased gross margin to a lesser extent was a 45% increase in our relatively higher margin service sales for the nine months ended September 30, 2008.

Operating Expenses

Sales, marketing and support expense for the nine months ended September 30, 2008 increased by $0.5 million, or 4%, to $11.8 million from $11.3 million for the nine months ended September 30, 2007. As a percentage of sales, year-to-date sales, marketing and support expense was approximately 19% in 2008 and 2007. The primary reason for the dollar increase in 2008 was a $0.6 million increase in sales, marketing and support expense related to our Danish subsidiary in support of a 30% increase in sales by the subsidiary from the first nine months of 2007 to the first nine months of 2008. Also contributing to the increase in sales, marketing and support expense of our Danish subsidiary was a 13% increase in the average valuation of the Danish Krone versus the U.S. dollar year-over-year.

Research and development expense for the nine months ended September 30, 2008 decreased by $1.2 million, or 17%, to $5.8 million from $7.0 million for the nine months ended September 30, 2007. As a percentage of sales, year-to-date research and development expense decreased to 9% in 2008 from 11% in 2007. The primary reason for the decrease in 2008 was the capitalization of approximately $2.2 million of aviation antenna development costs (see note 13 to the condensed consolidated financial statements) during the nine months ended September 30, 2008, partially offset by increased spending related to our initiative for the global expansion of our mini-VSAT Broadband satellite communication service, and other new product initiatives.

General and administrative expense for the nine months ended September 30, 2008 decreased by $0.8 million, or 13%, to $5.3 million from $6.1 million for the nine months ended September 30, 2007. As a percentage of sales, year-to-date general and administrative expense decreased to 9% in 2008 from 10% in 2007. The primary reason for the decrease in 2008 was a $1.4 million reduction in legal expense due to our August 2007 favorable judgment in the U.S. District Court for the District of Minnesota in relation to a patent infringement lawsuit. Partially offsetting the decrease was an increase in general and administrative related employee compensation of $0.6 million primarily as a result of an increase in accrued performance based incentive compensation.

Interest and Other Income

Interest and other income for the nine months ended September 30, 2008 decreased by $1.2 million to $0.7 million from $1.9 million for the nine months ended September 30, 2007. The primary reason for the decrease is a $1.0 million decrease in interest income resulting from lower interest rates and a lower average amount of cash, cash equivalents and marketable securities invested during the nine months ended September 30, 2008. Also contributing to the decrease was a $0.1 million increase in losses related to foreign currency exchange contracts and a $0.1 million decrease in currency gains driven by a decrease in gains from remeasurement of transactions at our Danish subsidiary, which has the U.S. dollar as its functional currency.

Income Taxes

Income tax expense for the nine months ended September 30, 2008 increased by $0.1 million to $0.5 million from $0.4 million for the nine months ended September 30, 2007. The primary reason for the increase in the 2008 period was a $0.1 million federal income tax benefit recorded in 2007 to reconcile our federal income tax expense to our 2006 federal income tax return that was completed and filed in September 2007. We expect that substantially all of our 2008 taxable income generated from our U.S. operations will be offset by federal net operating losses generated by us in prior years. Accordingly, we expect that any tax expense generated by our U.S. operations in 2008 will be made up primarily of federal alternative minimum tax and to a lesser extent certain state tax expense. Taxable income generated by our subsidiary in Denmark will be subject to taxation at the Danish statutory rates as we have no net operating loss carry-forwards or tax credits available to offset current or future taxable income in that jurisdiction.

Liquidity and Capital Resources

We have historically funded our operations primarily from operating cash flows, net proceeds from public and private equity offerings, bank financings and proceeds received from exercises of stock options. As of September 30, 2008, we had $49.4 million in cash, cash equivalents and marketable securities and $59.9 million in working capital.

Net cash provided by operations was $4.2 million for the nine months ended . . .