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. 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 are a leading manufacturer of solutions that provide global high-speed internet, television, and voice services via satellite to mobile users at sea, on land, and in the air. We are also a premier manufacturer of high-performance navigational sensors and integrated inertial systems for defense and commercial guidance and stabilization applications.

Our mobile satellite business includes receive-only TracVision satellite TV systems, 2-way TracPhone satellite communications systems, and the mini-VSAT Broadband airtime service. 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 by LiveTV. 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 and airtime services 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 and 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
                                             March 31, (in thousands)
                                              2009             2008
             Mobile communications        $      11,047    $      18,066
             Guidance and stabilization           7,228            5,067

             Net sales                    $      18,275    $      23,133

In addition to revenue from product sales, our mobile satellite revenue includes revenue earned from product repairs, revenue from satellite phone and Internet usage services, and certain DIRECTV account referral fees earned in conjunction with the sale of our products. We provide, for a fee, third-party satellite phone and Internet airtime to our TracPhone and Internet customers who choose to activate their subscriptions with us. We also earn revenue from service sold with our mini-VSAT products. Under current DIRECTV programs, we are eligible to receive a one-time, new mobile account activation fee from DIRECTV for each customer who activates their DIRECTV service directly through us. Our guidance and stabilization revenue primarily includes product sales to both military and commercial markets and, to a lesser extent, revenue from 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 10 of the notes to the condensed consolidated financial statements provides information regarding our sales to specific geographic regions.

Critical Accounting Policies and Estimates

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, 2008.

As described in our Form 10-K for the year ended December 31, 2008, 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 deferred income tax assets and liabilities and warranty. We have reviewed our policies and determined that these remain our most critical accounting policies for the quarter ended March 31, 2009, except as set forth below. Readers should refer to our 2008 Form 10-K under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" for the detailed descriptions of these policies.

Income Taxes and Deferred Income Tax Assets and Liabilities

Our deferred tax assets and liabilities reflect the future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and of tax credits. Deferred tax assets arise when a company's financial statements recognize charges or expenses that, for income tax purposes, will not be allowed as deductions until future periods. For example, when a corporation accrues an expense in its financial statements that it is not allowed to deduct on its federal tax return until paid in the future, the future tax benefit of that expense is generally recorded in the income statement as a reduction of income tax expense and in the balance sheet as a deferred tax asset. The same general treatment applies to the carry forward of unused net operating losses and unused tax credits. Deferred tax assets are often netted with deferred tax liabilities when presented in the balance sheet and are referred to as net deferred tax assets. We measure our deferred tax assets and liabilities using the tax rates and laws we expect to be in effect at the time of their reversal or utilization.

Under SFAS No. 109, "Accounting for Income Taxes," a net deferred tax asset may be carried on the balance sheet at its full value only if it is more likely than not that the deductions, losses, or credits giving rise to such deferred tax asset will be used in the future. We periodically evaluate our deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including our historical profitability and projections of future taxable income. The ultimate realization

of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. Under U.S. generally accepted accounting principles (GAAP), we are required to establish a valuation allowance for deferred tax assets and record a charge to income or stockholders' equity if we determine, based on available evidence at the time the determination is made, that it is not more likely than not that some or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment based upon assumptions that are subject to change from period to period as a result of changes in circumstances, changes in tax laws, variances between our projected operating performance and our actual results and other factors.

At December 31, 2008, we had recorded a valuation allowance of $4,124 against gross deferred tax assets of $8,068. During the first quarter of 2009, we completed a federal and state research and development tax credit review covering the years from 2000 through 2006. As a result of this review, as of March 31, 2009 we recorded an additional gross deferred tax asset with an offsetting valuation allowance in the amount of $1,758 related to federal research and development credits and an additional $599 gross deferred tax asset with an offsetting valuation allowance related to state research and development credits.

The valuation allowance that we have recorded against a portion of our gross deferred tax assets is due to our management's judgment that, after considering all of the available objective evidence, including available tax planning strategies, historical and prospective results of operations, with greater weight given to historical evidence, it is more likely than not that that portion of the asset will not be realized.

Our net deferred tax assets of $3,366 at March 31, 2009 consist primarily of federal net operating loss carry-forwards that are available to offset future taxable income. Our conclusion that it is more likely than not that these net deferred tax assets are realizable is based in part upon our tax planning strategy. Our strategy to utilize these assets is premised upon our ability to sell our property located in Middletown, Rhode Island in order to generate taxable income to utilize these loss carry-forwards before they expire. This is not an action that we would ordinarily take, but one that we would take, if necessary, to realize the tax benefits prior to their expiration. Our judgment that $3,366 of our deferred tax assets are realizable as of March 31, 2009 is based upon our belief that, should we decide to execute on this strategy, the property sale would generate net taxable gains sufficient to utilize that amount of the deferred tax assets. Our estimate as to the amount of our net deferred tax assets therefore depends substantially upon an assessment of the fair market value of the Middletown property. Future changes in property values in and around the Middletown, Rhode Island area or in the assumptions used in the valuation process could result in a different estimate of the fair value of the property, which in turn could require us to revise our estimate of the amount of our deferred tax assets that is realizable. Any such change in the amount of our net deferred tax assets could have a material effect on our results of operations.

Results of Operations

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



                                                Three months ended
                                                     March 31,
                                                2009           2008
               Sales:
               Product                            85.2 %         91.9 %
               Service                            14.8            8.1

               Net sales                         100.0          100.0


               Costs and expenses:
               Costs of product sales             60.7           53.8
               Costs of service sales              9.2            4.1
               Sales, marketing and support       22.8           17.7
               Research and development           11.6           10.1
               General and administrative         10.5            7.5

                                                   Three months ended
                                                       March 31,
                                                   2009           2008
             Total costs and expenses               114.8          93.2

             (Loss) income from operations          (14.8 )         6.8
             Interest income                          0.6           1.9
             Interest expense                         0.1           0.2
             Other expense                            0.0           0.9

             (Loss) income before income taxes      (14.3 )         7.6
             Income tax (benefit) expense            (0.3 )         0.8

             Net (loss) income                      (14.0 )%        6.8 %

Three Months Ended March 31, 2009 and 2008

Net Sales

Product sales for the three months ended March 31, 2009 decreased $5.6 million, or 27%, to $15.6 million from $21.2 million for the three months ended March 31, 2008. The weakening of the recreational vehicle market commencing in the second quarter of 2008 due in part to increased fuel prices, and the crisis of consumer confidence in the general economy during the second half of the year, caused declines in demand for our land mobile products and our marine consumer products. Sales of our marine consumer products, principally our TracVision M-series satellite television products and Inmarsat-compatible TracPhone products, decreased by $4.5 million, or 37%, compared with the three months ended March 31, 2008. In addition, sales of our land mobile products decreased by $3.5 million, or 77%, compared to the three months ended March 31, 2008. Mobile communications product sales originating from our Danish subsidiary decreased $2.7 million, or 49%, from the three months ended March 31, 2008 to the three months ended March 31, 2009. Contributing to this decrease in sales originating from our European location were unfavorable currency rate fluctuations between the Euro and the U.S. dollar. Mobile communications product sales originating from North America decreased $5.3 million, or 47%, from the three months ended March 31, 2008 to the three months ended March 31, 2009.

Sales of our guidance and stabilization products increased by $2.4 million, or 54%, from the three months ended March 31, 2008 to the three months ended March 31, 2009. Specifically, sales of our FOG products increased $2.3 million, or 95%, driven largely by increased sales in support of remotely operated weapons station programs.

Service sales for the three months ended March 31, 2009 increased $0.8 million, or 44%, to $2.7 million from $1.9 million for the three months ended March 31, 2008. The primary reason for the increase was a $0.9 million increase in airtime sales for our mini-VSAT Broadband service that we launched in the fourth quarter of 2007, which was partially offset by a decline in service repair sales and contracted engineering service sales of $0.1 million.

Costs of Sales

For the three months ended March 31, 2009, costs of product sales decreased by $1.4 million, or 11%, to $11.1 million for the three month ended March 31, 2009 from $12.5 million for the three months ended March 31, 2008. The primary reasons for the decrease in dollar amount were the decline in unit sales and a shift in sales mix to lower priced marine products.

Costs of service sales increased by $0.7 million, or 78%, to $1.7 million for the three month ended March 31, 2009 from $1.0 million for the three months ended March 31, 2008. This increase was driven by increased airtime usage of our mini-VSAT Broadband service as well as by increased costs related to the build out and operation of the network and support infrastructure for our mini-VSAT Broadband service as part of our initiative for the global expansion of that service. We expect these costs to continue to increase substantially during 2009.

Gross margin from product sales for the three months ended March 31, 2009 decreased to 29% from 41% in the year-ago period. The deterioration in our gross margin from product sales was attributable to under-utilization of our production capacity due to reduced unit sales, a higher level of price discounts to maintain our competitive position in the mobile communications marketplace and the increase in our inventory reserves.

Gross margin from service sales for the three months ended March 31, 2009 decreased to 38% from 50% in the year-ago period, as a result of increased costs related to the build out and operations of the network and support infrastructure for our mini-VSAT Broadband service. In the near term, we expect these costs to continue to grow more rapidly than the number of subscribers for, and revenues from, our mini-VSAT Broadband service. Also contributing to the decrease in gross margin from service sales was a $0.1 million decline in service repair sales and contracted engineering service sales.

Operating Expenses

Sales, marketing and support expense for the three months ended March 31, 2009 increased by $0.1 million, or 2%, to $4.2 million from $4.1 million for the three months ended March 31, 2008. As a percentage of sales, sales, marketing and support expense increased during the quarter ended March 31, 2009 to 23% from 18% for the quarter ended March 31, 2008, due primarily to the decrease in overall product sales discussed above.

Research and development expense for the three months ended March 31, 2009 decreased by $0.2 million, or 9%, to $2.1 million from $2.3 million for the three months ended March 31, 2008. The primary reason for the decrease in 2009 expense was the capitalization of approximately $0.6 million of aviation antenna development costs (see note 14 to the condensed consolidated financial statements) during the first quarter of 2009, partially offset by increased spending related to our initiative for the global expansion of our mini-VSAT Broadband satellite communication products and service. As a percentage of sales, research and development expense increased during the quarter ended March 31, 2009 to 12% from 10% for the quarter ended March 31, 2008, due primarily to the decrease in product sales discussed above.

General and administrative expense for the three months ended March 31, 2009 increased by $0.2 million, or 10%, to $1.9 million from $1.7 million for the three months ended March 31, 2008. The primary reason for the increase in 2009 expense was $0.1 million in accounting consultant fees related to the research and development tax credit study that was completed in the first quarter of 2009. Also contributing to the increase was increased legal fees associated with licensing arrangements in connection with the global expansion of our mini-VSAT Broadband satellite communication service. As a percentage of sales, general and administrative expenses increased during the quarter ended March 31, 2009 to 11% from 8% for the quarter ended March 31, 2008, due primarily to the decrease in product sales discussed above.

Interest Income and Other Expense

Interest income and other expense for the three months ended March 31, 2009 decreased by $0.1 million to $0.1 million from $0.2 million for the three months ended March 31, 2008. The primary reason for the decrease was a $0.3 million decrease in interest income in the 2009 period resulting from lower interest rates and a lower average amount of cash, cash equivalents and marketable securities invested during the three months ended March 31, 2009. Also contributing to the decrease was a $0.3 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. Partially offsetting these factors was a $0.5 million decrease in losses related to foreign currency exchange contracts.

Income Tax (Benefit) Expense

Income tax expense for the three months ended March 31, 2009 decreased by $0.2 million to a benefit of ($0.0) million from a provision of $0.2 million for the three months ended March 31, 2008. Our effective tax rate was (1.8%) for the three months ended March 31, 2009 compared to 10.9% for the year-ago period. The primary reason for the decrease in 2009 was our $2.6 million pre-tax loss. Also contributing to the decrease was a $0.1 million federal income tax benefit recorded in 2009 from the monetization of research and development tax credits. We expect that substantially all of our 2009 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 2009 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 2009 and project net income for 2010 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 the valuation allowance at such time and recognize a reduction of income tax expense (as of March 31, 2009, the maximum amount of reduction which could impact income tax expense totaled approximately $5.6 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 March 31, 2009, such amount would total approximately $1.9 million).

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 March 31, 2009, we had $37.1 million in cash, cash equivalents and marketable securities and $55.0 million in working capital.

Net cash used in operations was $2.6 million for the three months ended March 31, 2009 as compared to net cash provided by operations of $1.2 million for the three months ended March 31, 2008. The decrease is primarily due to a $4.1 million decrease in net income coupled with a $4.4 million increase in cash outflows related to accounts payable and accrued expenses, a $0.4 million increase in cash outflows related to prepaid expenses and other current assets and a $0.3 million increase in cash outflows related to other long term assets, consisting primarily of capitalized development costs related to our aviation antenna program. This increase in cash outflows was partially offset by a $3.8 million increase in cash inflows attributable to changes in accounts receivable, primarily due to a decrease in our sales levels, coupled with a $1.9 million increase in cash inflows related to decreased inventory levels.

Net cash provided by investing activities was $4.1 million for the three months ended March 31, 2009 as compared to net cash used in investing activities of $0.9 million for the three months ended March 31, 2008. The increase is primarily due to a $4.8 million decrease in our net investment in marketable securities.

Net cash used in financing activities was $2.6 million for the three months ended March 31, 2009 as compared to net cash used in financing activities of $2.5 million for the three months ended March 31, 2008. The increase is primarily due to the final $2.0 million balloon payment to pay off our former mortgage loan, partially offset by a $2.0 million decrease in repurchases of common stock in 2009.

On January 11, 1999, we entered into a mortgage loan in the amount of $3.0 million related to our headquarters facility in Middletown, Rhode Island. The loan term was 10 years, with a principal amortization of 20 years at a fixed rate of interest of 7.0%. Land, building and improvements secured the mortgage loan. The monthly mortgage payment was $23,259, including interest and principal. Due to the difference in the term of the loan and amortization of the principal, a balloon payment of $2.0 million was due on February 1, 2009. We made the final $2.0 million balloon payment on the mortgage loan on January 30, 2009. On April 6, 2009, we entered into a new mortgage loan related to the same property in the amount of $4.0 million. The note term is 10 years and during the term, the interest rate will be a rate per year adjusted periodically based on a defined interest period equal to the BBA Libor Rate plus 2.25 percentage points. Land, building and improvements with an approximate carrying value of $5.3 million as of March 31, 2009 secure the mortgage loan. The monthly mortgage payment is approximately $9,400 plus interest beginning on May 1, 2009 and increasing in increments of approximately $1,000 each year throughout the life of the mortgage. Due to the difference in the term of the note and amortization of the principal, a balloon payment of approximately $2.6 million plus interest is due on April 1, 2019. The loan contains one financial covenant, a Fixed Charge Coverage Ratio, which applies in the event that our consolidated cash, cash equivalents and marketable securities balance falls below $25.0 million at . . .