• LXE - Provides rugged mobile terminals and wireless data collection equipment for logistics management systems and;

• Satellite Communications - Offers satellite-based communication, tracking, and messaging solutions through a broad array of terminals and antennas for the aeronautical, ground-mobile and emergency management markets. This reportable operating segment includes the previously reported SATCOM segment, and the newly acquired Sky Connect business (please refer to Note 3 of the consolidated financial statements provided immediately following the signature page of this Annual Report on Form 10-K for additional information).

We sell D&S products primarily for defense and space applications. We sell LXE products and the majority of Satellite Communications' products for commercial applications. Sales of products for U.S. government end-use comprised 40.8%, 24.6% and 21.3% of our net sales in 2008, 2007 and 2006, respectively. Our sales to customers in the United States accounted for 60.4%, 61.2% and 68.4% of our consolidated net sales in 2008, 2007 and 2006, respectively. The largest single geographic market for our products outside the U.S. has recently been the United Kingdom, which accounted for 8.5%, 7.3% and 5.2% of consolidated net sales in 2008, 2007 and 2006, respectively. Net sales from our non-U.S. markets have generally increased when the Euro and other local functional currencies have increased in value as compared with the U.S. dollar. Financial and Performance Highlights of 2008 Following is a summary of significant factors affecting the Company in 2008:
• Net sales reached an all-time high of $335.0 million in 2008, a 16.4% increase compared to 2007, mainly due to record sales at Satellite Communications and D&S. Net sales at LXE increased by 5.1% despite the challenging global economic climate.

• Operating income was slightly higher in 2008 as compared with 2007. Part of the revenue increase in 2008 was from SATCOM's work on the Inmarsat Global satellite/GMS phone project, which was not profitable in 2008. An agreement was reached with Inmarsat in January 2009 and the project has been concluded with the full effect recognized in the fourth quarter of 2008. Operating profits increased for the remainder of Satellite Communications' business and for Defense & Space in 2008 as compared with 2007. Operating income for LXE was down due to the challenging global economic climate and approximately $1.1 million of severance charges in 2008.

• Income tax for 2008 was a net benefit of $0.7 million. A $927,000 tax benefit was recognized in 2008 related to revised estimates for research and development costs qualifying for U.S. Federal tax credits from prior years. We also recognized a $1.2 million benefit from the reduction of the valuation allowance against deferred tax assets based upon the continuing profitability of SATCOM.

Description of Net Sales, Costs and Expenses Net sales
The amount of net sales is generally the most significant factor affecting our operating income in a period. We recognize product-related net sales under most of our customer agreements when we ship completed units or complete the installation of our products. If multiple deliverables are involved in a revenue arrangement, or if software included in an offering is more than incidental to a product as a whole, we recognize revenue in accordance with FASB Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition, as applicable. If the customer agreement is in the form of a long-term contract (mainly at D&S and to a lesser degree at Satellite Communications), we recognize revenue under the percentage-of-completion method, using the ratio of cost-incurred-to-date to total-estimated-cost-at-completion as the measure of performance. Estimated manufacturing cost-at-completion for each of these contracts is reviewed on a routine periodic basis, and adjustments are made periodically to the estimated cost-at-completion based on actual costs incurred, progress made, and estimates of the costs required to complete the contractual requirements. When the estimated manufacturing cost-at-completion exceeds the contract value, the contract is written down to its net realizable value, and the loss resulting from cost overruns is immediately recognized. If the customer agreement is in the form of a cost-reimbursement contract, we recognize revenue based on the type of fee specified in the contract, which is typically a fixed fee, award fee or a combination of both.
We also generate net sales from product-related service contracts and repair services for D&S, LXE and Satellite Communications, and engineering services projects for D&S, and to a lesser degree at Satellite Communications. We recognize revenue from product-related service contracts and extended warranties ratably over the life of the contract. We recognize revenue from repair services as services are rendered. We recognize revenue from contracts for engineering services using the percentage-completion method for fixed price contracts, or as costs are incurred for cost-type contracts. Cost of sales
For our LXE and D&S products, we conduct most of our manufacturing efforts in our Atlanta-area facilities. We manufacture the majority of our Satellite Communications' products at our facility in Ottawa, Canada.
Product cost of sales includes the cost of materials, payroll and benefits for direct and indirect manufacturing labor, engineering and design costs, outside costs such as subcontracts, consulting or travel related to specific contracts, and manufacturing overhead expenses such as depreciation, utilities and facilities maintenance.
We sell a wide range of advanced wireless communications products into markets with varying competitive conditions, and cost of sales as a percentage of net sales varies with each product. Consequently, the mix of products sold in a given period is a significant factor affecting our operating income. The cost-of-sales percentage is principally a function of competitive conditions, and product and customer mix, but Satellite Communications is also affected by changes in foreign currency exchange rates mainly because the Canadian-based SATCOM business derives most of its net sales from contracts denominated in U.S. dollars, but incurs most of its costs in Canadian dollars. As the U.S. dollar weakens against the Canadian dollar, our reported manufacturing costs may increase relative to our net sales, which would increase the cost-of-sales percentage. If the U.S. dollar strengthens, the opposite effect would result. Our LXE business derives a significant portion of its net sales from international markets, mainly in Euros, but incurs most of its costs in U. S. dollars. As the U.S dollar weakens against the Euro and other international currencies, our reported net sales may increase relative to our costs, which would decrease the cost-of-sales percentage. If the U.S. dollar strengthens, the opposite effect would result.

Service cost of sales is based on labor and other costs recognized as incurred to fulfill obligations under most of our service contracts. Cost of sales for long-term engineering services contracts are based on labor and other costs incurred, relative to the estimated cost to complete the contractual deliverables.
Selling, general and administrative expenses Selling, general and administrative ("SG&A") expenses include salaries, commissions, bonuses and related overhead costs for our personnel engaged in sales, administration, finance, information systems and legal functions. Also included in SG&A expenses are the costs of engaging outside professionals for consultation on legal, accounting, tax and management information system matters, auditing and tax compliance, and general corporate expenditures to other outside suppliers and service providers. Research and development expenses
Research and development ("R&D") expenses represent the cost of our development efforts, net of reimbursement under specific customer-funded R&D agreements. R&D expenses include salaries of engineers and technicians and related overhead expenses, the cost of materials utilized in research, and additional engineering or consulting services provided by independent companies. R&D costs are expensed as they are incurred. We also often incur significant development costs to meet the specific requirements of customer contracts in D&S and Satellite Communications, and we report these costs in the consolidated statements of operations as cost of sales.
Interest income and other
Interest income and other mainly includes interest income from investments in government-obligations money market funds, other money market instruments, and interest-bearing deposits.
Interest expense
We incur interest expense principally related to mortgages on certain facilities, and through the amortization of deferred financing costs related to our revolving credit facilities. We incurred no interest expense in 2007 or 2008 related to borrowings under revolving credit facilities because during those periods we had no borrowings outstanding under these facilities during those periods.
Foreign exchange gains and losses
We recognize foreign exchange gains and losses, mainly in our Satellite Communications and LXE segments, related to assets and liabilities that are denominated in a currency different than the local functional currency. For our Canada-based SATCOM business, most trade receivables are denominated in U.S. dollars; when the U.S. dollar weakens against the Canadian dollar, the value of SATCOM's trade receivables decreases and foreign exchange losses result. For our LXE segment's international subsidiaries, most trade payables are in U.S. dollars and relate to their purchases of hardware from LXE's U.S. operations for sale in Europe and Asia; when the U.S. dollar weakens against the Euro or other international currency, the value of the LXE subsidiaries' trade payables decreases and foreign exchange gains result. If the U.S. dollar strengthens, the opposite effect on trade payables and foreign exchange gains and losses result. We regularly assess our exposures to changes in foreign currency exchange rates and as a result, we enter into forward currency contracts to reduce those exposures. The notional amount of each forward currency contract is based on the amount of exposure for net assets or liabilities subject to changes in foreign currency exchange rates. We record changes in the fair value of these contracts in our consolidated statements of operations. Income taxes
Typically, the main factor affecting our effective income tax rate each year is the relative proportion of taxable income that we expect to earn in Canada, where the effective rate is lower than in the U.S., or other locations. The lower effective rate in Canada results from certain Canadian tax benefits for research-related expenditures.

Discontinued operations
In 2005 and 2006, we disposed of our former Space & Technology/Montreal ("S&T/Montreal"), Satellite Networks ("SatNet") and EMS Wireless divisions, which have been reported as discontinued operations. In determining the gain or loss recognized on the sale of our discontinued operations, the accumulated other comprehensive income with respect to those divisions was recognized in net earnings at the time of sale.
The sales agreements for each of these dispositions contained standard indemnification provisions for various contingencies that could not be resolved before the dates of closing, and for various representations and warranties provided by the Company and the purchasers. The Company records a liability related to a contingency, representation or warranty when management considers that the liability is both probable and can be reasonably estimated.

Results of Operations
(as a percentage of net sales, unless noted otherwise)

                                                                    Years Ended December 31
                                                            2008             2007             2006
Product net sales                                            81.6 %           86.0 %           85.6 %
Service net sales                                            18.4             14.0             14.4

Net sales                                                   100.0            100.0            100.0
Product cost of sales, as a percentage of product
net sales                                                    64.3             61.3             62.4
Service cost of sales, as a percentage of service
net sales                                                    61.2             58.6             66.7
Cost of sales                                                63.8             60.9             63.0
Selling, general and administrative expenses                 24.5             25.9             25.4
Research and development expenses                             5.8              6.5              6.1

Operating income                                              5.9              6.7              5.5
Interest income and other                                     0.7              1.9              0.9
Interest expense                                             (0.5 )           (0.7 )           (0.7 )
Foreign exchange loss, net                                   (0.2 )           (0.5 )           (0.3 )

Earnings from continuing operations before income
taxes                                                         5.9              7.4              5.4
Income tax benefit (expense)                                  0.2             (0.7 )            0.7

Earnings from continuing operations                           6.1              6.7              6.1


Discontinued operations:
Loss (earnings) from discontinued operations before
income taxes                                                    -             (0.2 )            9.3
Income tax benefit (expense)                                    -                -             (2.8 )

(Loss) earnings from discontinued operations                    -             (0.2 )            6.5

Net earnings                                                  6.1 %            6.5 %           12.6 %

Years ended December 31, 2008 and 2007:
Net sales increased by 16.4% to $335.0 million from $287.9 million, for 2008 as compared with 2007, with net sales growth contributed by each of the Company's three reportable operating segments. Satellite Communications and D&S recorded the largest growth in net sales, with increases of 25.1% and 29.7%, respectively. These increases were mainly due to the strong demand for high-speed-data aeronautical products from both commercial and military markets and the revenues generated from the development of the Inmarsat global satellite/GSM phone by our Satellite Communications segment, and the increased activity on both commercial and military programs by our D&S segment. Net sales for LXE were higher by 5.1% primarily due to growth in net sales from the

international market along with a favorable effect of changes in exchange rates that increased the reported net sales from international markets.
Product net sales increased by 10.4% to $273.3 million in 2008 as compared with 2007 mainly due to the strong demand for high-speed-data aeronautical products from both commercial and military markets, and higher net sales of terminals and wireless data collection equipment for logistics management systems. Service net sales increased by $21.4 million to $61.8 million in 2008 as compared with 2007 mainly due to significant work performed on a military communications research project by D&S. Service net sales made up a slightly higher percentage of total net sales in 2008 compared with 2007.
Overall cost of sales as a percentage of consolidated net sales increased in 2008 as compared with 2007, due to higher cost-of-sales percentages recorded by each of our three reportable segments. Product cost of sales as a percentage of its respective net sales increased in 2008 as compared with 2007, mainly due to a higher percentage of net sales generated from indirect channels at LXE, and the revenues generated in 2008 by Satellite Communications related to an agreement to develop the Inmarsat global satellite/GSM phone, that did not generate gross margin. An agreement was reached with Inmarsat in January 2009 and the project has been concluded with the full effect recognized in the fourth quarter of 2008. Service cost of sales as a percentage of its respective net sales increased in 2008 as compared with 2007, mainly due to a higher percentage of net sales generated by D&S, which has a higher cost-of-sales percentage than our LXE and Satellite Communications segments.
SG&A expenses as a percentage of consolidated net sales were lower in 2008 as compared with 2007. The $7.8 million growth in actual expenses related to the effect of changes in foreign currency exchange rates that increased the reported costs of the international activities at LXE, and sales-related efforts, such as selling and marketing, to support the growth in net sales. SG&A expenses also included additional costs from our Trux and Sky Connect operations which were acquired in February and August 2008, respectively, as well as approximately $1.1 million of severance costs primarily related to staff reductions in LXE's international operations that occurred during 2008. These additional costs were partially offset by the impact of management's cost-reduction efforts at LXE which began in the second quarter of 2008.
R&D expenses increased by $0.6 million mainly due to additional internal development programs for next-generation products at SATCOM, and the effect of changes in foreign currency exchange rates on its reported costs. Interest income decreased by $3.0 million mainly as a result of lower average interest rates earned on our investment balances and to a lesser extent the decrease in the average investment balances.
Our foreign currency forward contract program was somewhat more effective in reducing the currency risk in 2008, resulting in smaller foreign currency exchange losses in 2008 as compared with 2007.
Income tax for 2008 was a net benefit of $0.7 million. A $0.9 million tax benefit was recognized in 2008 related to revised estimates for research and development costs qualifying for U.S. Federal tax credits from prior years. We also recognized a $1.3 million benefit in 2008 from the reduction of the valuation allowance against deferred tax assets based upon the expected continuing profitability of SATCOM. Excluding these special items, our effective income tax rate for 2008 was 7.7%. The rate was 9.8% for the year ended December 31, 2007. The decrease in the estimated annual rate is due to a higher proportion of earnings in Canada, where we have a much lower effective rate than in the U.S. or other locations due to research-related tax benefits. The effective tax rate for 2009 is expected to be less than 10%. Years ended December 31, 2007 and 2006:
Net sales increased by 10.2% to $287.9 million from $261.1 million in 2007 as compared with 2006, and net sales grew in each of the Company's three segments. Satellite Communications and D&S recorded the largest growth in net sales through 2007, with increases of 27.2% and 12.7%, respectively. These increases were mainly the result of strong sales of high-speed-data aeronautical products by Satellite Communications, and of increased activity by D&S on U.S. military programs, and on a new commercial satellite program by D&S. LXE's net sales were slightly higher because the growth in net sales from international markets offset the decline in net sales from the Americas markets.

Product net sales increased by 10.7% to $247.5 million in 2007 as compared with 2006. This increase in consolidated product net sales was mainly due to 29.0% growth in product net sales at Satellite Communications that resulted from continued strong demand for its high-speed-data aeronautical products, as well as higher revenues recognized on long-term contracts at D&S. Service net sales increased by 7.4% to $40.4 million in 2007 as compared with 2006 mainly due to growth in the LXE and Satellite Communications service businesses, which supports the increased number of products placed into service. As a percentage of total net sales, product net sales and service net sales remained relatively unchanged in 2007 as compared with 2006.
Consolidated total cost of sales, as a percentage of consolidated total net sales, decreased in 2007 as compared with 2006 due to lower cost-of-sales percentages recorded by each of our three segments, and a higher proportion of total net sales generated by Satellite Communications, which generally has the Company's lowest cost of sales percentage. Product cost of sales, as a percentage of its respective net sales, decreased in 2007 as compared with 2006 due to Satellite Communications' lower material costs and more favorable product mix, as well as improved contract performance by D&S. Service cost of sales, as a percentage of its respective net sales, decreased in 2007 as compared with 2006, due to lower repair rates experienced under existing maintenance contracts by Satellite Communications and LXE.
SG&A, as a percentage of consolidated net sales, increased slightly from 25.4% to 25.9%. The increase in the SG&A percentage and the $8.2 million increase in SG&A expenditures related to: (1) efforts to support the growth in net sales,
(2) the effect of changes in foreign currency exchange rates on the reported costs of LXE and Satellite Communications, and (3) an increase of approximately $550,000 in the allowance for doubtful accounts at Satellite Communications. R&D expenses increased by $3.0 million mainly due to additional internal development programs for new product introductions by LXE, and next-generation products at Satellite Communications. R&D expenses also increased due to the effect of changes in foreign currency exchange rates on the reported costs of Satellite Communications. Interest income increased by $3.1 million in additional interest income earned from higher average investment balances. This was primarily due to the $49.9 million received from the sale of the EMS Wireless division in December 2006. Our foreign currency derivative program was somewhat less effective in reducing the currency risk related to the timing of the growth in foreign sales in 2007, resulting in greater foreign exchange losses in 2007 as compared with 2006. The Company's effective tax rate for 2007 was 9.8%, as compared with the pro forma effective rate of 30% (excluding the benefit of a $3.3 million recognition of estimated research and development credits generated in the U.S., and a $1.7 million benefit realized from the reduction of the valuation allowance based on the expected continuing profitability of Satellite Communications) for 2006. This decrease in the effective income tax rate in 2007 was based mainly upon a higher proportion of profits earned in Canada and other foreign jurisdictions, where we have a much lower effective rate than in the U.S. The lower effective tax rates outside the U.S. are due to research-related tax benefits in Canada and generally lower marginal statutory rates in Europe.

Net Sales, Cost of Sales, and Operating Income (Loss) by Segment Our segment net sales, cost-of-sales as a percentage of respective segment net sales, and segment operating income (loss) for the years ended December 31, 2008, 2007 and 2006 were as follows (in thousands, except percentages):

                                               Years Ended December 31
                                          2008          2007          2006
            Net sales:
            Defense & Space             $  76,643        59,090        52,416
            LXE                           145,885       138,821       138,001
            Satellite Communications      112,517        89,968        70,702

            Total                       $ 335,045       287,879       261,119


            Cost-of-sales percentage:
            Defense & Space                  77.0 %        75.4 %        79.1 %
            LXE                              60.3          58.0          58.5
            Satellite Communications         58.4          55.9          59.4
            Total                            63.8          60.9          63.0

            Operating income (loss):
            Defense & Space             $   6,381         4,876         2,572
            LXE                             2,861         7,067        11,043
            Satellite Communications       14,187        12,189         6,170
            Corporate                      (3,805 )      (4,865 )      (5,428 )

            Total                       $  19,624        19,267        14,357

Defense & Space: Net sales reached an all-time-high of $76.6 million in 2008, an increase of 29.7% as compared with 2007. Customer orders in 2008 were a record $125.7 million. This increased sales order volume contributed to the increase in net sales as it allowed Defense & Space to expand its workforce to meet the order demand. A large military research project in 2008 was an individually significant contributor to the net sales increase. The strong order volume also left Defense & Space with a record backlog for long-term contracts of $114.9 million at December 31, 2008, a 75% increase from December 31, 2007. Net sales in 2007 increased by 12.7% as compared with 2006, mainly due to increased activity on U.S. military programs, and a significant commercial satellite program that began in 2007. With the higher backlog at December 31, 2008, net . . .