• Defense & Space ("D&S") supplies highly engineered subsystems for defense electronics and sophisticated satellite applications - from military communications, radar, surveillance and countermeasures to commercial high-definition television, satellite radio, and live TV for innovative airlines; and

• LXE provides rugged mobile terminals and wireless data networks used for logistics applications such as distribution centers, warehouses and container ports. LXE operates mainly in two markets: the Americas market which is comprised of North, South and Central America; and the International market, which is comprised of all other geographic areas, with the highest concentration in Europe.

Following is a summary of significant factors affecting or related to our results of operations in the three months and six months ended July 4, 2009:
• We completed the acquisitions of Formation and Satamatics on January 9, 2009 and February 13, 2009, respectively. These newly acquired product lines along with Sky Connect, LLC ("Sky Connect"), which was acquired in August of 2008, contributed $19.0 million and $36.3 million of net sales, and $0.3 million and $0.6 million in earnings before income taxes in the second quarter and first six months of 2009.

• Consolidated net sales grew by 19.3% and 20.7% in the second quarter and first six months of 2009, respectively, as compared with the same periods of 2008 mainly due to higher net sales at Communications & Tracking (principally reflecting the newly acquired product lines), and D&S, partially offset by lower net sales at LXE (reflecting the challenging global economic climate).

• Our net earnings for the six months ended July 4, 2009 included $5.5 million of acquisition-related charges that are now required to be reported as a current expense per Statement of Financial Accounting Standards ("SFAS") No. 141(R), Business Combinations,$4.3 million of amortization of intangible assets related to our new acquisitions, and approximately $2.3 million of severance costs. Our net earnings for the three months ended July 4, 2009 included $1.6 million of acquisition-related charges, $2.5 million of amortization of intangible assets related to our new acquisitions, and approximately $1.2 million of severance costs.

• Our markets are strong but not immune to increasing pressures and risks. The current economic conditions are affecting our businesses and we expect that we will continue to be faced with these economic pressures throughout at least the remainder of 2009. These and other factors could cause a decline in expected future cash flows for one or more of our business units (including LXE and our recently acquired businesses) and require us to recognize an impairment loss related to goodwill or other intangible assets.

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 Communications & Tracking), 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 entire estimated loss resulting from the projected 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, repair services, and engineering services projects. 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 Communications & Tracking 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 Communications & Tracking and LXE are also affected by changes in foreign currency exchange rates. Our 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 and when the U.S. dollar weakens against the Canadian dollar, our reported manufacturing costs for SATCOM increase relative to our net sales, which increases the cost-of-sales percentage. When the U.S. dollar strengthens, the opposite effect results. 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. When the U.S. dollar weakens against the Euro and other international currencies, our reported net sales generally increase relative to our costs, which decreases the cost-of-sales percentage. When the U.S. dollar strengthens, the opposite effect generally results.
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 Communications & Tracking, and we report these costs in the consolidated statements of operations as cost of sales.
Acquisition-related charges
Acquisition-related charges primarily represent the costs of engaging outside professionals for legal, due diligence, business valuation, and integration services related to business combinations. The category also includes changes in the estimated fair value of the contingent consideration liability associated with one acquisition, including accretion of the discounted liability. Interest income
Interest income is earned primarily from our 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 our revolving credit facility.
Foreign exchange gains and losses
We recognize foreign exchange gains and losses at any of our subsidiaries that has assets and liabilities that are denominated in a currency different than the its 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 equipment from LXE's U.S. operations for sale in Europe; when the U.S. dollar weakens against the Euro or other international currencies, the value of the LXE subsidiaries' trade payables decreases and foreign exchange gains result. When the U.S. dollar strengthens, the opposite effect on trade payables and foreign exchange gains and losses results.
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. and other locations. The lower effective rate in Canada results from certain Canadian tax benefits for research-related expenditures.

Results of Operations
The following table sets forth the percentage relationship of each line item to
net sales for each period.

                                                    Three Months Ended                  Six Months Ended
                                                  July 4           June 28          July 4           June 28
                                                   2009             2008             2009             2008

Product net sales                                   78.3 %           81.1             76.5             82.7
Service net sales                                   21.7             18.9             23.5             17.3

Net sales                                          100.0            100.0            100.0            100.0
Product cost of sales as a percentage of
product net sales                                   66.8             64.4             67.6             63.3
Service cost of sales as a percentage of
service net sales                                   62.9             60.1             66.3             60.5
Cost of sales                                       66.0             63.6             67.3             62.9
Selling, general and administrative
expenses                                            24.4             25.4             24.5             26.0
Research and development expenses                    4.4              6.8              4.6              6.7
Acquisition-related charges                          1.7                -              2.9                -

Operating income                                     3.5              4.2              0.7              4.4
Interest income                                      0.1              0.9              0.1              1.1
Interest expense                                    (0.7 )           (0.5 )           (0.7 )           (0.5 )
Foreign exchange gain (loss), net                    0.2              0.2             (0.1 )            0.1

Earnings before income taxes                         3.1              4.8                -              5.1
Income tax benefit (expense)                         0.2             (0.6 )            0.1             (0.3 )

Net earnings                                         3.3 %            4.2              0.1              4.8

Three Months ended July 4, 2009 and June 28, 2008:
Net sales increased by 19.3% to $96.9 million from $81.3 million for the second quarter of 2009 as compared with the same period of 2008 reflecting growth in net sales from two of the Company's three reportable operating segments, Communications & Tracking and D&S, with increases of 69.2% and 33.0%, respectively. The increase in net sales by Communications & Tracking was generated from our recently acquired product lines. D&S's net sales were higher mainly due to significant work performed on a military communications research project, and the increased activity on both commercial and military programs due to the expansion of its workforce to meet order demands. LXE's net sales for the second quarter of 2009 were $7.7 million less than the same period of 2008, with lower net sales in both the Americas and International markets.
Product net sales increased by 15.1% to $75.9 million in the second quarter of 2009 as compared with the second quarter of 2008. This increase was primarily due to the $15.3 million of product net sales generated from our recently acquired product lines, partially offset by lower net sales by LXE. Service net sales increased by 37.3% to $21.0 million in the second quarter of 2009 as compared with the same period of 2008, mainly due to significant work performed on a military communications research project by D&S. As a result, service net sales comprised a higher percentage of total net sales in the second quarter of 2009 as compared with the second quarter of 2008.
Overall cost of sales as a percentage of consolidated net sales was higher in the second quarter of 2009 as compared with the same period of 2008 due to higher cost-of-sales percentages reported by two of our three reportable operating segments, D&S and LXE. Product cost of sales, and service cost of sales, as a percentage of their respective net sales were also higher in the second quarter of 2009 as compared with the same period of 2008. The increase in product cost of sales as a percentage of its respective net sales was mainly due to a lower production volume by our LXE segment over which fixed costs were absorbed, an unfavorable effect of changes in foreign currency exchange rates, and a change in product mix by our D&S segment. The increase in service cost-of-sales percentage was mainly due to a higher proportion of service revenues generated from our D&S segment, which has a higher service cost-of-sales percentage than our other two reportable operating segments. Product cost of sales and service cost of sales were also affected by approximately $0.5 million of additional severance costs recorded in the second quarter of 2009, compared to the second quarter of 2008, for a reduction in workforce across all divisions to realign the staffing needs of the business with current economic conditions.

SG&A expenses as a percentage of consolidated net sales decreased for the second quarter of 2009 as compared with the second quarter of 2008. Actual expenses grew by $3.0 million in the second quarter of 2009 as compared with the same period of 2008 mainly due to the additional costs related to the acquired product lines, including additional amortization of intangible assets, and higher professional fees related to defending claims asserted under representations and warranty provisions of the sales agreement for our EMS Wireless discontinued operations. These additional costs were partially offset by the impact of management's continued cost reduction efforts at LXE, and the favorable effect of changes in foreign currency exchange rates on our LXE and SATCOM international operations. The lower percentage of net sales is a result of increasing costs at a lower rate than the rate of increase in net sales. R&D expenses decreased by $1.2 million mainly due the impact of management's cost reduction efforts, mainly at LXE, the additional funding received from the Canadian government under a program to encourage technology development in areas such as satellite communications, and the favorable effect of changes in foreign currency exchange rates. These decreases in expenses were partially offset by additional R&D expenses related to our recently acquired product lines. Acquisition-related charges were $1.6 million in the second quarter of 2009. These costs included a charge recorded to increase the contingent consideration liability to reflect changes in the expected probability of paying the projected amounts, accretion of the discounted liability, as well as professional fees related to the acquisition of our Formation and Satamatics businesses. See Note 2 to the consolidated financial statements in this Quarterly Report for additional information on these business acquisitions.
Interest income decreased by $0.6 million mainly as a result of the decrease in the average investment balances and, to a lesser extent, lower average interest rates earned on our investment balances.
The second quarter of 2009 included a $0.2 million foreign exchange net gain related to the conversion of assets and liabilities not denominated in the functional currency and changes in the fair value of forward contracts used to hedge against currency exposure.
We recognized an income tax benefit of $160,000 in the second quarter of 2009. The benefit is derived from one jurisdiction with losses for the period and other adjustments of estimated tax expense to the actual tax return amounts. In our other jurisdictions we project no tax expense for the year based upon management's expectations for taxable income and tax credits for the full year. The 2008 second-quarter expense of $484,000 was based on management's projection of the effective rate for the full year offset by a benefit of $742,000 primarily related to a change in estimate of prior-year research and development credits available in the U.S. The decrease in expected rates for the full year is due to a higher expected proportion of profits to be earned in Canada, where we have a much lower effective rate than in the U.S. and other jurisdictions, and to a higher expected U.S. federal tax credit for current-year qualifying research and development costs. No benefit was recognized in the second quarter 2008 for the U.S. federal credit since the benefit for 2008 was not enacted until the fourth quarter of 2008. The lower effective tax rate in Canada is due to research-related tax benefits. The overall effective rate is subject to change during the remainder of the year, as actual results and revised forecasts may change management's expectations for the taxable income associated with various tax jurisdictions. In addition, additional tax benefits could be recognized in the U.S. in the third quarter as a result of a completed Internal Revenue Service audit examination for the tax year 2006. We received a letter from the Service after July 4, 2009 that indicated that they made no changes to the reported tax as a result of the examination. We will revise our estimate of certain unrecognized tax benefits based on the results of the examination. Management will complete its analysis in the third quarter and reflect any additional benefit at the time as required by GAAP. Management's estimated range of additional benefit is $1.0 million to $1.5 million. Six Months ended July 4, 2009 and June 28, 2008:
Net sales increased by 20.7% to $189.2 million from $156.8 million for the first six months of 2009 as compared with the same period of 2008 reflecting growth in net sales from two of the Company's three reportable operating segments, Communications & Tracking and D&S, with increases of 64.7% and 51.4%, respectively. The increase in net sales by Communications & Tracking was generated from our recently acquired product lines. D&S's net sales were higher mainly due to significant work performed on a military communications research project and the

increased activity on both commercial and military programs due to the expansion of its workforce to meet order demands. LXE's net sales for the first six months of 2009 were $18.0 million less than the same period of 2008, with lower net sales in both the Americas and International markets.
Product net sales increased by 11.6% to $144.7 million in the first six months of 2009 as compared with the first six months of 2008. This was primarily due to the $30.0 million of product net sales generated from our recently acquired product lines, partially offset by lower net sales by LXE. Service net sales increased by 64.2% to $44.5 million in the first six months of 2009 as compared with the same period of 2008, mainly due to significant work performed on a military communications research project by D&S. As a result, service net sales comprised a higher percentage of total net sales in the first six months of 2009 as compared with the first six months of 2008.
Overall cost of sales as a percentage of consolidated net sales was higher in the first six months of 2009 as compared with the same period of 2008 due to higher cost-of-sales percentages reported by each of our three reportable operating segments. Product cost of sales, and service cost of sales, as a percentage of their respective net sales were also higher in the first six months of 2009 as compared with the same period of 2008. The increase in product cost of sales as a percentage of its respective net sales was mainly due to a lower production volume by our LXE segment over which fixed costs were absorbed, an unfavorable effect of changes in foreign currency exchange rates, and a change in our Communications & Tracking segment with the addition of our new product lines which had higher cost-of-sales percentages than SATCOM, primarily due to the amortization of intangible assets. The increase in service cost-of-sales percentage was mainly due to a higher proportion of service revenues generated from our D&S segment, which has a higher service cost-of-sales percentage than our other two reportable operating segments. Product cost of sales and service cost of sales were also higher due to approximately $0.9 million of additional severance costs recorded in the first six months of 2009 for a reduction in workforce across all divisions to realign the staffing needs of the business with current economic conditions. SG&A expenses as a percentage of consolidated net sales decreased for the first six months of 2009 as compared with the first six months of 2008. Actual expenses grew by $5.4 million in the first six months of 2009 as compared with the same period of 2008 mainly due to the additional costs related to the acquired product lines, including additional amortization of intangible assets, higher professional fees related to defending claims asserted under representations and warranty provisions of the sales agreement for our EMS Wireless discontinued operations, and approximately $0.4 million of additional severance costs. These additional costs were partially offset by the impact of management's continued cost reduction efforts at LXE, and the favorable effect of changes in foreign currency exchange rates on our LXE and SATCOM international operations. The lower percentage of net sales is a result of increasing costs at a lower rate than the rate of increase in net sales. R&D expenses were $1.8 million lower than the prior year mainly due to the additional funding received from the Canadian government under a program to encourage technology development in areas such as satellite communications, the impact of management's cost reduction efforts, mainly at LXE, and the favorable effect of changes in foreign currency exchange rates. These decreases in expenses were partially offset by additional R&D expenses related to our recently acquired product lines.
Acquisition-related charges were $5.5 million in the first six months of 2009. These costs were primarily for professional fees for legal, due-diligence, valuation, and integration services for the acquisition of our Formation and Satamatics businesses, as well as amounts charged for the increase in the contingent consideration liability and accretion of the discounted earn-out liability.
Interest income was $1.6 million lower than the prior year mainly as a result of lower average investment balances and, to a lesser extent, lower average interest rates earned on our investment balances.
The first six months of 2009 included a $1.4 million foreign exchange loss related to the funding of the Satamatics acquisition, which was required to be paid in British pounds sterling. The loss resulted from changes in foreign currency exchange rates from the date we funded the transaction to the date the acquisition was completed. Partially offsetting this loss in the period were net gains from the conversion of assets and liabilities not denominated in the functional currency and changes in the fair value of forward contracts used to hedge against currency exposure.

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