OVERVIEW

Astronics Corporation, through its subsidiaries Astronics Advanced Electronic Systems Corp., Luminescent Systems Inc. and Luminescent Systems Canada Inc. designs and manufactures electrical power generation, control and distribution systems and lighting systems and components, for the aerospace industry. We operate four principal facilities located in New York State, New Hampshire, Washington State and Quebec, Canada. We serve the three primary aircraft markets which are the military, commercial transport and the business jet markets. In 2008, the breakdown of sales to the commercial transport market, the military market and the business jet market were 59.9%, 19.9% and 19.5%, respectively, miscellaneous sales to non-aerospace markets accounted for 0.7% of sales.

Astronics' strategy is to develop and maintain positions of technical leadership in its chosen aerospace and defense markets, to leverage those positions to grow the amount of content and volume of product it sells to those markets and to selectively acquire businesses with similar technical capabilities that could benefit from our leadership position and strategic direction.

In January 2009 Astronics acquired DME Corporation (DME), a designer and manufacturer of military test, training and simulation equipment and aviation safety products. Astronics purchased 100 percent of the outstanding stock of DME for approximately $51 million. The acquisition was financed with a $40 million, five year term note with quarterly principal payments of $2 million beginning in the second quarter of 2009, 500,000 shares of unregistered Astronics Common stock and seller financing for $5 million to $7 million depending on achieving a revenue target of $82 million in 2009. The seller notes are due in 2014.

Key factors affecting Astronics' growth, revenue and profitability are the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into the plans for new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft. Once designed into a new aircraft, the spare parts business is frequently retained by the Company.

Sales to the Commercial transport market totaled approximately 59.9% of our total revenue in 2008. Our cabin electronics products which provide in-seat power for passengers and power to in-flight entertainment systems (IFE) found on Commercial Airlines around the world accounted for the majority of our sales to this market. Since 2005 we have seen our sales to the commercial transport markets increase from $30 million to over $100 million in 2008. Most of this growth has been driven by increased installations of our cabin electronics products used to power in-flight entertainment systems and in-seat power systems by airlines around the world. Maintaining and growing our sales to the Commercial transport market will depend on airlines capital spending budgets for cabin up-grades as well as for new aircraft such as the Boeing 787 and Airbus A380. We expect these new aircraft, once in production will be equipped with more IFE and in-seat power than previous generation aircraft. Additionally, our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major in-flight entertainment suppliers and global airlines.

Our military market sales are typically comprised of several significant "programs" such as providing a power conversion unit for the Tactical Tomahawk and Taurus missiles and lighting and fire suppression units for V-22 Osprey programs complemented by many spare parts orders covering many aircraft platforms. Products sold to the military market include our cockpit, exterior and cabin lighting and airframe power products. The military market is dependent on governmental funding which can change from year to year. Risks are that overall spending may be reduced in the future, specific programs may be eliminated or that we fail to win new business through the competitive bid process. Astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss. We believe that we will continue to have opportunities similar to past years regarding this market.

Another market we serve is the business jet market. Sales to the business jet market are driven by our increasing content on new aircraft and build rates of new aircraft. In 2008 we saw volume and average ship set value increase in the business jet market as the production rates for new business jets increased during the year. Products sold to the business jet market include our cockpit lighting, airframe power and exterior lighting products. Our sales to the business jet market will be particularly challenged in the upcoming years as aircraft production rates are expected to be reduced significantly from 2008 levels as the global economy struggles. Additionally, there is a large supply of used aircraft in the market and financing of new aircraft has become more challenging for prospective buyers. Our largest business jet customer during 2008, Eclipse Aviation Corporation filed for bankruptcy protection in November of 2008. In 2008 Astronics had revenue totaling approximately $9 million from Eclipse. Relating to this, in the fourth quarter Astronics took a pre-tax charge to income for $10.0 million for outstanding accounts receivable, inventory, tooling and fixed assets relating to the Eclipse 500 aircraft. Despite the current market conditions, we continue to see a wide range of opportunities to employ our technology in the business jet markets, however there is risk involved in the development of any new aircraft.

Each of the markets that we serve is presenting opportunities for our product lines that we expect will provide continued growth for the Company over the long-term. We continue to look for opportunities in all three markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.

In 2009 we expect our revenue to increase as a result of the January 30, 2009 acquisition of DME Corporation. We are projecting 2009 revenues to be in the range of $230 million to $245 million. Impacted by current economic conditions, the aerospace market is extremely difficult to predict at this time as new aircraft production rates are modified frequently by the airframe manufacturers creating a very fluid and difficult to predict revenue stream over the next twelve months. Excluding DME revenue we expect organic Astronics revenue to be in the range of $155 million to $165 million based on information available at this time. We expect fairly flat sales to the commercial transport market and military markets and a decrease in the business jet market. We expect 2009 DME revenue to be in the range of $75 million to $80 million for the eleven month period after closing of the acquisition as we await the results on several significant contract awards that could impact 2009 revenue. Revenue for 2009 can be affected by not only the ultimate award of the contract, but the timing of when the contract is awarded and when delivery begins. Despite expected lower organic 2009 revenue as compared with 2008, we still see many opportunities for long term growth and expect to continue to invest in developmental programs to expand our products and technologies. In addition, we expect that the next generation of commercial transports such as the Boeing 787 and Airbus A380 will be equipped with more in-seat power and in-flight entertainment than the aircraft they will be replacing. We expect this will provide a significant opportunity for us as these aircraft enter and ramp up production over the next several years.

Challenges which continue to face us include improving shareholder value through increasing profitability. Increasing profitability is dependent on many things, primarily revenue growth and, the Company's ability to control operating expenses and to identify means of creating improved productivity. Revenue is driven by increased build rates for existing aircraft, market acceptance and economic success of new aircraft, continued government funding of defense programs, the Company's ability to obtain production contracts for parts we currently supply or have been selected to design and develop for new aircraft platforms. Demand for our products is driven by the discretionary spending of aircraft owners and airlines and new aircraft build rates. Reduced aircraft build rates driven by a weak economy, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market will likely result in reduced demand for our products which will result in lower profits. Many of our newer development programs are based on new and unproven technology and at the same time we are challenged to develop the technology on a schedule that is consistent with specific aircraft development programs. We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.

2009 ACQUISITION

On January 30, 2009, the Company acquired 100% of the common stock of DME. The purchase price was approximately $51 million, comprised of approximately $40 million in cash, 500,000 shares of the Company's common stock previously held as treasury shares, valued at $3.6 million, or $7.17 per share, a $5.0 million subordinated note payable to the former shareholders plus an additional $2.0 million subject to meeting revenue performance criteria in 2009. DME Corporation is a provider of weapons and communications test equipment, training and simulation devices and aviation safety solutions.

Audited financial statements for DME and pro-forma combined financial information for Astronics and DME will be available and included in a Form 8-K filing expected to be filed in April 2009.

In connection with the funding of this Acquisition, the Company amended its existing $60 million credit facility by entering into an $85 million Amended and Restated Credit Agreement dated January 30, 2009, with HSBC Bank USA, National Association, Bank of America, N.A. and KeyBank National Association. The Credit Agreement provides for a five-year, $40 million senior secured term loan with interest at LIBOR plus between 2.25% and 3.50% based on the Company's leverage ratio. The proceeds of the term loan were used to finance the Acquisition. The Credit Agreement also provides for a revolving credit line of $45 million, of which approximately $30 million is currently available for working capital requirements and is committed for three years through January 2012, with interest at LIBOR plus between 2.25% and 3.50%. In addition, the Company is required to pay a commitment fee of between 0.30% and 0.50% on the unused portion of the total credit commitment for the preceding quarter, based on the Company's leverage ratio under the Credit

Agreement. The credit facility allocates up to $20 million of the $45 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit.

A portion of the purchase price was funded by the issuance to the former shareholders of DME a 6.0% subordinated promissory note due 2014 in the aggregate principal amount of $5 million. To evidence its obligations related to the Contingent Payment, the Company also issued a 6.0% subordinated contingent promissory note due 2014 in the aggregate principal amount of $2 million. Payment under the contingent promissory note is due depending on achieving a revenue target for DME of $82 million in 2009.

The Company's obligations under the Credit Agreement are jointly and severally guaranteed by Astronics Advanced Electronic Systems Corp., Luminescent Systems, Inc. and DME, each a wholly-owned domestic subsidiary of the Company. The obligations are secured by a first priority lien on substantially all of the Company's and the guarantors' assets.

In the event of voluntary or involuntary bankruptcy of the Company, all unpaid principal and any other amounts due under the Credit Agreement automatically become due and payable without presentation, demand or notice of any kind to the Company. Other Events of Default, including failure to make payments as they become due, give the Agent the option to declare all unpaid principal and any other amounts then due, immediately due and payable.

CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of the Company's financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management's application of accounting policies, which are discussed in the Notes to the Consolidated Financial Statements, Note 1 of Item 8, Financial Statements and Supplementary Data of this report. The critical accounting policies have been reviewed with the audit committee of our board of directors.

Revenue Recognition

Revenue is recognized on the accrual basis at the time of shipment of goods and transfer of title. There are no significant contracts allowing for right of return. The Company does evaluate and record an allowance for any potential returns based on experience and any known circumstances. For the years ended December 31, 2008 and 2007, no allowances were recorded for contracts allowing for right of return. A trade receivable is recorded at the value of the sale. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral.

Accounts Receivable and Allowance for Doubtful Accounts

The Company records a valuation allowance to account for potentially uncollectible accounts receivable. The allowance is determined based on Management's knowledge of the business, specific customers, review of receivable aging and a specific identification of accounts where collection is at risk. At December 31, 2008, the Company's allowance for doubtful accounts for accounts receivable was $0.3 million, or 1.4% of gross accounts receivable. At December 31, 2007, the Company's allowance for doubtful accounts for accounts receivable was $0.5 million, or 2.4% of gross accounts receivable.

In the fourth quarter of 2008, the Company wrote off all receivables amounting to approximately $1.0 million from Eclipse Aviation Corporation, a customer that declared bankruptcy during the fourth quarter of 2008. The impact amounts to approximately a $0.6 million reduction in net income or $.06 per diluted share.

Inventory Valuation

The Company records valuation reserves to provide for excess, slow moving or obsolete inventory or to reduce inventory to the lower of cost or market value. In determining the appropriate reserve, Management

considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as reserving for specifically identified inventory that the Company believes is no longer salable. At December 31, 2008, the Company's reserve for inventory valuation was $10.5 million, or 22.7% of gross inventory. At December 31, 2007, the Company's reserve for inventory valuation was $4.1 million, or 10.0% of gross inventory.

In the fourth quarter of 2008, the Company recorded a reserve for inventory on hand used exclusively for the Eclipse 500 aircraft. Eclipse Aviation Corporation, the manufacturer of the aircraft has filed for bankruptcy protection, ceased production, terminated its workforce and petitioned the bankruptcy court to liquidate its assets. The pre-tax charge relating to the Eclipse inventory amounted to approximately $7.4 million, reducing net income by approximately $4.8 million or $0.45 per diluted share.

Deferred Tax Asset Valuation Allowances

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. We consider recent earnings projections, allowable tax carryforward periods, tax planning strategies and historical earnings performance to determine the amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would impact our income tax expense when we determine that these factors have changed.

As of December 31, 2008, the Company had net deferred tax assets of $6.1 million, net of a $0.7 million valuation allowance. These assets relate principally to liabilities or asset valuation reserves that result in timing difference between generally acceptable accounting principles recognition and treatment for income tax purposes, as well as a state investment tax credit carry-forwards and foreign research and development tax credit carryforwards.

Goodwill

The Company's goodwill is the result of the excess of purchase price over net assets acquired from acquisitions. As of December 31, 2008, the Company had $2.6 million of goodwill. The Company tests goodwill for impairment at least annually during the fourth quarter, and whenever events occur or circumstances change that indicates there may be impairment. The process of evaluating the Company's goodwill for impairment is subjective and requires significant estimates. These estimates include judgments about future cash flows that are dependent on internal forecasts, long-term growth rates and estimates of the weighted average cost of capital used to discount projected cash flows. Based on the discounted projected cash flows, management has concluded that there is no impairment of the Company's goodwill.

Supplemental Retirement Plan

The Company maintains a supplemental retirement plan for certain executives. The accounting for this plan is based in part on certain assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used. The assumptions for increases in compensation and the discount rate for determining the cost recognized in 2008 were 5.0% and 5.75%, respectively. The discount rate used for the projected benefit obligation as of December 31, 2008 was 5.75%. The assumption for compensation increases takes a long-term view of inflation and performance based salary adjustments based on the Company's approach to executive compensation. For determining the discount rate the Company considers long-term interest rates for high-grade corporate bonds.

RESULTS OF OPERATIONS

Sales

Sales for 2008 increased by $15.5 million, or 9.8%, to $173.7 million from $158.2 million in 2007. The sales increase was driven by increased volume sold to meet higher demand for our products. By market, the

increase was the result of an increase in sales to the military market of $9.1 million to $34.5 million, the commercial transport market of $3.7 million to $104.1 million and the business jet market of $2.7 million to $34.0 million. Other markets remained flat at $1.1 million. The sales increase to the Military market by product line included $3.1 million from Airframe Power products, $3.9 million from Cockpit Lighting products, $1.9 million from Exterior Lighting products and $0.2 million in other products. The increase in sales to the commercial transport market was primarily a result of a $1.7 million increase in sales of Cabin Electronics products, a $0.8 million increase in Airframe Power products, $0.6 million increase in Cabin Lighting products and $0.6 million increase in Cockpit Lighting products. The increase of sales to the business jet market was primarily a result of a $2.7 million increase in sales of Cockpit Lighting products.

Sales for 2007 increased by $47.4 million or 42.9%, to $158.2 million from $110.8 million in 2006. By market, the increase was primarily the result of an increase in sales to the commercial transport market of $39.2 million to $100.5 million and an increase in sales to the business jet market of $8.3 million to $31.2 million. The military market and other markets remained flat at $25.4 million and $1.1 million, respectively. The increase in sales to the Commercial transport market was primarily a result of $37.4 million increase from Cabin Electronics and a $1.0 million increase from Cockpit Lighting products. The Cabin Electronics increase resulted from increased volume driven by increasing installations of in-seat power and power for in-flight entertainment systems as retrofits for existing aircraft. Sales increases of Cockpit Lighting were a result of increased volume as new aircraft build rates increase as compared to last year. The increase of sales to the business jet market was primarily a result of $3.8 million increase from Airframe power sales, a $3.3 million increase in Cockpit Lighting and a $1.2 million increase of Exterior Lighting sales, all driven by increasing product demand of aircraft containing our products and increasing ship set content on those new aircraft.

Expenses and Margins

Cost of products sold as a percentage of sales increased by 8.3 percentage points to 82.5% in 2008 from 74.2% in 2007. This increase was due primarily to an increase in engineering and design costs of $8.1 million, a $7.4 million reserve for Eclipse 500 aircraft inventory and a $1.6 million reserve for machinery and equipment specifically used in the Eclipse 500 aircraft, somewhat offset by leverage provided by the increased sales volume. It is our intention to continue investing in capabilities and technologies as needed that allows us to execute our strategy to increase the ship set content and value we provide on aircraft in all markets that we serve. The rate of spending on these activities, however, will largely be driven by market opportunities.

Cost of products sold as a percentage of sales decreased by 4.8 percentage points to 74.2% in 2007 from 79.0% in 2006. This decrease was due to leverage provided by the increased sales volume offset by an increase in engineering and design costs of $3.9 million.

Selling, general and administrative expenses ("SG&A") increased $1.0 million in 2008 to $17.4 million compared to $16.4 million in 2007. This increase is due primarily to the $1.0 million bad debt expense relating to the Eclipse Aviation Corporation accounts receivable write off. As a percentage of sales SG&A was flat at 10.0% compared to 10.4% for the same period of 2007.

Selling, general and administrative expenses ("SG&A") increased $2.8 million to $16.4 million in 2007 from $13.6 million in 2006 primarily the result of increased wages and benefits. As a percentage of sales, SG&A expense was 10.4% in 2007 compared to 12.3% in 2006 as sales grew at a faster pace than SG&A spending.

Net interest expense was $0.7 million and $1.4 million in 2008 and 2007 respectively. The decrease in interest expense was due primarily to lower average borrowings throughout the year on our revolving credit facility and lower interest rates on the variable rate debt.

Net interest expense was $1.4 million and $0.9 million in 2007 and 2006 respectively. The Series 2007 Industrial Revenue Bonds issued in the first quarter of 2007 to finance the building and manufacturing expansion project in New York, higher average borrowing levels throughout the year on our revolving credit facility and increased averaged interest rates on our variable rate debt were the reasons for the increase when compared to 2006.

Income Taxes

The effective tax rate was 32.0% in 2008, 1.1 percentage points lower than the effective tax rate of 33.1% in 2007. The majority of the change was due to the impact of permanent differences, utilization of foreign research and development tax credits and state and foreign taxes as a percentage of pretax income. We expect in future years, the effective tax rate will continue to approximate statutory rates in effect.

The effective tax rate was 33.1% in 2007, 1.4 percentage points lower than the effective tax rate of 34.5% in 2006. The majority of the change was due to the impact of permanent differences and lower state and foreign taxes as a percentage of pretax income, which were partially offset by a non-cash charge to income tax expense of $0.5 million to reduce our deferred tax assets relating primarily to 2007 New York State investment tax credits on the new building and equipment and foreign research and development tax credit carryforwards.

Off Balance Sheet Arrangements

We do not have any material off -balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.

Contractual Obligations

The following table represents contractual obligations as of December 31, 2008:


                                                                  Payments Due by Period*
                                          Total          2009         2010-2011        2012-2013        After 2013

(In thousands)
Purchase Obligations                     $ 25,535      $ 24,857      $       678      $         -      $          -
Long-Term Debt                             14,446           920            2,429            2,463             8,634
Operating Leases                            7,986         1,975            3,682            2,329                 -
Interest on Long-Term Debt                    616           121              221              165               109
Other Long Term Liabilities                 1,081           193              481              156               251

Total Contractual Obligations            $ 49,664      $ 28,066      $     7,491      $     5,113      $      8,994

* This table excludes Supplemental Retirement Plan and related Post Retirement Obligations for which we anticipate making $0.4 million in annual payments in 2009 through 2013. This table excludes principal and interest payments under the new Credit Agreement and the subordinated promissory notes entered into on January 30, 2009. Principal payments on the $40 million senior secured term loan are payable in quarterly installments of $2.0 million commencing April 1, 2009. The outstanding principal on the subordinated promissory notes are due in 2014.

Notes to Contractual Obligations Table

Note Payable and Long-Term Debt - See item 8, Financial Statements and Supplementary Data, Note 2, Long-Term Debt and Note Payable in this report.

Interest on Long-Term Debt - Interest on Long-Term Debt consists of payments on the Series 1999 Industrial Revenue Bonds issued through the Erie County, New York Industrial Development Agency taking into account the interest rate swap entered into on February 6, 2006 which effectively fixes the interest rate on this obligation at 3.99% through January 2016. We have excluded the variable rate interest on our note payable and other long-term debt.

Operating Leases - Operating lease obligations are primarily related to facility leases for our Astronics AES operations and facility leases for our Canadian operations.

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