The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, addressing the process of U.S. military procurement, the successful commercialization of our products, the successful integration of our acquired businesses, general domestic and global economic conditions, including the recent distress in the financial markets that has had an adverse impact on the availability of credit and liquidity resources generally, government and environmental regulation, finalization of non-bid government contracts, competition and customer strategies, technological innovations in the non-rechargeable and rechargeable battery industries, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein as anticipated, believed, estimated or expected or words of similar import. For further discussion of certain of the matters described above, see Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008.
The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and our Consolidated Financial Statements and Notes thereto contained in our Form 10-K for the year ended December 31, 2008.
The financial information in this Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts. General
We offer products and services ranging from portable and standby power solutions to communications and electronics systems. Through our engineering and collaborative approach to problem solving, we serve government, defense and commercial customers across the globe. We design, manufacture, install and maintain power and communications systems including: rechargeable and non-rechargeable batteries, standby power systems, communications and electronics systems and accessories, and custom engineered systems, solutions and services. We sell our products worldwide through a variety of trade channels, including original equipment manufacturers ("OEMs"), industrial and retail distributors, national retailers and directly to U.S. and international defense departments. (See Note 12 in the Notes to Condensed Consolidated Financial Statements for additional information.) We report our results in four operating segments: Non-Rechargeable Products, Rechargeable Products, Communications Systems and Design and Installation Services. The Non-Rechargeable Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries. The Rechargeable Products segment includes: rechargeable batteries, charging systems, uninterruptable power supplies and accessories, such as cables. The Communications Systems segment includes: power supplies, cable and connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment and integrated communication system kits. The Design and Installation Services segment includes: standby power and communications and electronics systems design, installation and maintenance activities and revenues and related costs associated with various development contracts. We look at our segment performance at the gross margin level, and we do not allocate research and development or selling, general and administrative costs against the segments. All other items that do not specifically relate to these four segments and are not considered in the performance of the segments are considered to be Corporate charges.

We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint ventures, which can broaden the scope of our products and services, expand operating and market opportunities and provide the ability to enter new lines of business synergistic with our portfolio of offerings.
In March 2008, we formed a joint venture, named Ultralife Batteries India Private Limited ("India JV"), with our distributor partner in India. The India JV assembles Ultralife power solution products and manages local sales and marketing activities, serving commercial, government and defense customers throughout India. We have invested $86 in cash into the India JV, as consideration for our 51% ownership stake in the India JV.
In June 2008, we changed our corporate name from Ultralife Batteries, Inc. to Ultralife Corporation. The purpose of the name change was to align our corporate name more closely with the business now being conducted by us, as we are no longer exclusively a battery manufacturing company.
On November 10, 2008, we acquired certain assets of U.S. Energy Systems, Inc. and its service affiliate, U.S. Power Services, Inc. ("USE" collectively), a nationally recognized standby power installation and power management services business. USE is located in Riverside, California. Under the terms of the agreement, the initial purchase price consisted of $2,865 in cash. In addition, on the achievement of certain post-acquisition financial milestones, we will issue up to an aggregate amount of 200,000 unregistered shares of our common stock, over a period of four years. (See Note 2 in the Notes to Condensed Consolidated Financial Statements for additional information.) On March 20, 2009, we acquired substantially all of the assets and assumed substantially all of the liabilities of the tactical communications products business of Science Applications International Corporation. The tactical communications products business ("AMTI"), located in Virginia Beach, Virginia, designs, develops and manufactures tactical communications products including amplifiers, man-portable systems, cables, power solutions and ancillary communications equipment. Under the terms of the asset purchase agreement for AMTI, the purchase price consisted of $5,717 in cash. (See Note 2 in the Notes to Condensed Consolidated Financial Statements for additional information.) Results of Operations
Three-month periods ended March 29, 2009 and March 29, 2008 Revenues. Consolidated revenues for the three-month period ended March 29, 2009 amounted to $39,803, a decrease of $9,784, or 19.7%, from the $49,587 reported in the same quarter in the prior year.
Non-Rechargeable product sales increased $956, or 6.5%, from $14,616 last year to $15,572 this year. The increase in Non-Rechargeable revenues was mainly attributable to higher shipments of our BA-5390 batteries to government/defense customers, offset in part by a decline in sales to automotive telematics customers.
Rechargeable product sales increased $7,116, or 105.6%, from $6,738 last year to $13,854 this year. The increase in Rechargeable revenues was mainly attributable to strong demand for batteries and charging systems from U.S. defense customers.
Communications Systems revenues decreased $19,818, or 82.4%, from $24,054 last year to $4,236 this year, due to deliveries of SATCOM-on-the-Move and other advanced communications systems in 2008 resulting primarily from the sizeable orders we received during the latter part of 2007, that did not reoccur in 2009.

Design and Installation Services revenues increased $1,962, or 46.9%, from $4,179 last year to $6,141 this year, mainly due to the added revenue base provided from the acquisition of USE in the fourth quarter of 2008.
Cost of Products Sold. Cost of products sold totaled $32,022 for the quarter ended March 29, 2009, a decrease of $6,690, or 17.3%, from the $38,712 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 78.1% for the three-month period ended March 29, 2008 to 80.5% for the three-month period ended March 29, 2009. Correspondingly, consolidated gross margin was 19.5% for the three-month period ended March 29, 2009, compared with 21.9% for the three-month period ended March 29, 2008, generally attributable to the margin decreases in the Non-Rechargeable Products, Communications Systems and Design and Installation Services segments, offset by improvements in the Rechargeable Products segment.
In our Non-Rechargeable Products segment, the cost of products sold increased $1,190, from $11,560 in the three-month period ended March 29, 2008 to $12,750 in 2009. Non-Rechargeable gross margin for 2009 was $2,822, or 18.1% of revenues, a decrease of $234 from 2008's gross margin of $3,056, or 20.9% of revenues. Non-Rechargeable gross margin declined for the three-month period ended March 29, 2009, primarily as a result of lower production volumes, in comparison to the three-month period ended March 29, 2008, that resulted in unfavorable overhead absorption.
In our Rechargeable Products segment, the cost of products sold increased $4,879, from $5,537 in the three-month period ended March 29, 2008 to $10,416 in 2009. Rechargeable gross margin for 2009 was $3,438, or 24.8% of revenues, an increase of $2,237 from 2008's gross margin of $1,201, or 17.8% of revenues. Rechargeable gross margin improved primarily as a result of higher sales volumes and favorable product mix, as well as lower costs for material and component parts.
In our Communications Systems segment, the cost of products sold decreased $14,737, from $17,933 in the three-month period ended March 29, 2008 to $3,196 in 2009. Communications Systems gross margin for 2009 was $1,040, or 24.6% of revenues, a decrease of $5,081 from 2008's gross margin of $6,121, or 25.4% of revenues. The decrease in the gross margin for Communications Systems resulted mainly from the change in the overall sales mix in this segment.
In our Design and Installation Services segment, the cost of sales increased $1,978, from $3,682 in the three-month period ended March 29, 2008 to $5,660 in 2009. Design and Installation Services gross margin for 2009 was $481, or 7.8% of revenues, a decrease of $16 from 2008's gross margin of $497, or 11.9% of revenues. Gross margin in this particular segment was weaker than expected due to expected short-term price competition with component suppliers, relatively low margin jobs that carried over from year-end, and ongoing integration efforts related to the USE acquisition.
Operating Expenses. Total operating expenses for the three-month period ended March 29, 2009 totaled $10,038, an increase of $1,526 from the prior year's amount of $8,512. Overall, operating expenses as a percentage of sales increased to 25.2% in the first quarter of 2009 from 17.1% reported in the prior year, due to the overall expense increase over a lower revenue base. Amortization expense associated with intangible assets related to our acquisitions was $341 for 2009 ($231 in selling, general and administrative expenses and $110 in research and development costs), compared with $520 for 2008 ($361 in selling, general, and administrative expenses and $159 in research and development costs). Research and development costs were $1,980 in 2009, an increase of $371, or 23.1%, over the $1,609 reported in 2008 as we increased our investment in product development and design activity. Selling, general, and administrative expenses increased $1,155, or 16.7%, to $8,058. This increase was comprised of costs related to recently acquired companies, in addition to higher sales and marketing expenses related to development of new territories for the standby power business and generally higher administrative costs.
Other Income (Expense). Other income (expense) totaled ($168) for the first quarter of 2009, compared to $103 for the first quarter of 2008. Interest expense, net of interest income, decreased $139,

to $179 for the first quarter of 2009 from $318 for the comparable period in 2008, mainly as a result of lower average borrowings under our revolving credit facility and lower interest rates. In 2008, we recognized a gain of $313 on the early conversion of the $10,500 convertible notes held by the sellers of McDowell, which related to an increase in the interest rate on the notes from 4.0% to 5.0% in October 2007. Miscellaneous income/expense amounted to income of $11 for the first quarter of 2009 compared with income of $108 for the same period in 2008. This decrease was primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.
Income Taxes. We reflected a tax provision of $91 for the first quarter of 2009 compared with $45 in the first quarter of 2008. The effective consolidated tax rate for the first quarter of 2009 was (3.8%) compared with 1.8% for the same period in 2008.
During the fiscal quarter ended December 31, 2006, we recorded a full valuation allowance on our net deferred tax asset, due to the determination, at that time, that it was more likely than not that we would not be able to utilize our U.S. and U.K. net operating loss carryforwards ("NOL's") that had accumulated over time. At March 29, 2009, we continue to recognize a valuation allowance on our U.S. deferred tax asset, to the extent that we believe, that it is more likely than not that we will not be able to utilize that portion of our U.S. NOL's that had accumulated over time. A U.S. valuation allowance is not required for the portion of the deferred tax asset that will be realized by the reversal of temporary differences related to deferred tax liabilities to the extent those temporary differences are expected to reverse in our carryforward period. At March 29, 2009, we continue to recognize a full valuation allowance on our U.K. net deferred tax asset, as we believe, at this time, that it is more likely than not that we will not be able to utilize our U.K. NOL's that had accumulated over time. (See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional information.) We continually monitor the assumptions and performance results to assess the realizability of the tax benefits of the U.S. and U.K. NOL's and other deferred tax assets, in accordance with the applicable accounting standards.
We have determined that a change in ownership, as defined under Internal Revenue Code Section 382, occurred in 2005 and 2006. As such, the domestic NOL carryforward will be subject to an annual limitation estimated to be in the range of approximately $12,000 to $14,500. The unused portion of the annual limitation can be carried forward to subsequent periods. We believe such limitation will not impact our ability to realize the deferred tax asset.
In addition, certain of our NOL carryforwards are subject to U.S. alternative minimum tax such that carryforwards can offset only 90% of alternative minimum taxable income. This limitation did not have an impact on income taxes determined for the first quarter of 2009. However, this limitation did have an impact of $54 on income taxes determined for the first quarter of 2008. The use of our U.K. NOL carryforwards may be limited due to the change in the U.K. operation during 2008 from a manufacturing and assembly center to primarily a distribution and service center. For further discussion, see Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008.
Net Income (Loss) Attributable to Ultralife. Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share were $2,512 and $0.15, respectively, for the three months ended March 29, 2009, compared to a net income attributable to Ultralife and earnings attributable to Ultralife common shareholders per diluted share of $2,434 and $0.14, respectively, for the same quarter last year, primarily as a result of the reasons described above. Average common shares outstanding used to compute diluted earnings per share decreased from 17,441,000 in the first quarter of 2008 to 17,115,000 in 2009, mainly due to the share repurchase program we initiated in the fourth quarter of 2008, offset by stock option and warrant exercises and restricted stock grants.
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income

(loss) before net interest expense, provision (benefit) for income taxes, depreciation and amortization, plus/minus expenses/income that we do not consider reflective of our ongoing operations. We use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors' use of operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the book amortization of intangible assets (affecting relative amortization expense), the age and book value of facilities and equipment (affecting relative depreciation expense) and other significant non-cash, non-operating expenses or income. We also present Adjusted EBITDA because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to net income (loss) attributable to Ultralife, the most comparable financial measure under U.S. generally accepted accounting principles ("U.S. GAAP"). We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with U.S. GAAP financial measures such as income (loss) from operations. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our U.S. GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of non-cash stock-based compensation, which is a non-cash expense that varies widely among companies. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures. The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation, or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:
• Adjusted EBITDA (1) does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) does not reflect changes in, or cash requirements for, our working capital needs; (3) does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) does not reflect income taxes or the cash requirements for any tax payments; and (5) does not reflect all of the costs associated with operating our business;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

• while stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and

• other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. Adjusted EBITDA is calculated as follows for the periods presented:

                                                     Three-Month Period Ended
                                                    March 29,          March 29,
                                                      2009               2008
    Net income (loss) attributable to Ultralife   $      (2,512 )     $     2,434
    Add: interest expense, net                              179               318
    Add: income tax provision                                91                45
    Add: depreciation expense                               942               998
    Add: amortization expense                               341               520
    Add: stock-based compensation expense                   536               487
    Less: gain on debt conversion                             -              (313 )

    Adjusted EBITDA                               $        (423 )     $     4,489

Liquidity and Capital Resources
As of March 29, 2009, cash and cash equivalents totaled $943, a decrease of $935 from the beginning of the year. During the three-month period ended March 29, 2009, we used $6,715 of cash from operating activities as compared to a usage of $3,259 for the three-month period ended March 29, 2008. The use of cash from operating activities in 2009 resulted mainly from increased working capital requirements, including higher balances of inventory, as we prepared to deliver on anticipated contract awards and to meet the anticipated delivery schedules for those awards.
We used $7,156 in cash for investing activities during the first three-month period of 2009 compared with $397 in cash used for investing activities in the same period in 2008. In 2009, we spent $393 to purchase plant, property and equipment, and $6,763 was used in connection with the acquisition of AMTI, as well as contingent purchase price payouts related to RedBlack and RPS. In 2008, we spent $376 to purchase plant, property and equipment.
During the three-month period ended March 29, 2009, we generated $12,904 in funds from financing activities compared to the generation of $2,116 in funds in the same period of 2008. The financing activities in 2009 included a $16,600 inflow from drawdowns on the revolver portion of our primary credit facility, and an inflow of cash from stock option and warrant exercises of $242, offset by an outflow of $612 for principal payments on term debt under our primary credit facility and capital lease obligations, and an outflow of $3,326 for the purchase of treasury shares related to our share repurchase program.
Inventory turnover for the first three months of 2009 was an annualized rate of approximately 2.6 turns per year, a decrease from the 4.6 turns for the full year of 2008. The decrease in this metric is mainly due to a buildup in inventory in anticipation of certain orders from the U.S. Government that have been delayed, as well as the decrease in the sales volumes during the quarter. Our Days Sales Outstanding (DSOs) was an average of 63 days for the first three months of 2009, an increase from the 2008 average of 53 days, mainly due to the overall domestic and global recessionary economic conditions.
As of March 29, 2009, we had made commitments to purchase approximately $542 of production machinery and equipment, which we expect to fund through operating cash flows or the use of debt.

Debt Commitments
Our primary credit facility consists of both a term loan component and a revolver component, and the facility is collateralized by essentially all of our assets, including those of our subsidiaries. The lenders of the credit facility are JP Morgan Chase Bank, N.A. and Manufacturers and Traders Trust Company (together, the "Lenders"), with JP Morgan Chase Bank acting as the administrative agent. The current revolver loan commitment is $35,000. Availability under the revolving credit component is subject to meeting certain financial covenants, including a debt to earnings ratio and a fixed charge coverage ratio. In addition, we are required to meet certain non-financial covenants. The rate of interest, in general, is based upon either the Prime Rate plus 50 to 200 basis points or LIBOR plus 300 to 500 basis points.
On June 30, 2004, we drew down on a $10,000 term loan under the credit facility. The term loan is being repaid in equal monthly installments of $167 over five years. On July 1, 2004, we entered into an interest rate swap arrangement in the notional amount of $10,000 to be effective on August 2, 2004, related to the $10,000 term loan, in order to take advantage of historically low interest rates. We received a fixed rate of interest in exchange for a variable rate. The swap rate received was 3.98% for five years. The total rate of interest paid by us is equal to the swap rate of 3.98% plus the applicable Eurodollar spread associated with the term loan. During the full year of 2008, the adjusted rate ranged from 5.73% to 6.48%. During the first three months of 2009, the adjusted rate was 6.48%. Derivative instruments are accounted for in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires that all derivative instruments be recognized in the financial statements at fair value. The fair value of this arrangement at March 29, 2009 resulted in a liability of $5, all of which was reflected as a short-term liability.
There have been several amendments to the credit facility during the past few years, including amendments to authorize acquisitions and modify financial covenants. Effective April 23, 2008, we entered into Amendment Number Ten to Credit Agreement ("Amendment Ten") with the banks. Amendment Ten increased the amount of the revolving credit facility from $15,000 to $22,500, an increase of $7,500. Additionally, Amendment Ten amended the applicable revolver and term rates under the Credit Agreement from a variable pricing grid based on quarterly financial ratios to a set interest rate structure based on either the current prime rate, or a LIBOR rate plus 250 basis points.
Effective January 27, 2009, we entered into an Amended and Restated Credit Agreement (the "Restated Credit Agreement") with the Lenders. The Restated Credit Agreement reflects the previous ten amendments to the original Credit Agreement dated June 30, 2004 between us and the Lenders and modifies certain of . . .