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. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. 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 is 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 fiber optic gyro (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       Nine months ended
                                         September 30,            September 30,
                                        2009         2008        2009        2008
                                                     (in thousands)
        Mobile communications        $    12,160   $ 12,269   $   35,739   $ 48,599
        Guidance and stabilization        10,483      3,471       27,036     12,589

        Net sales                    $    22,643   $ 15,740   $   62,775   $ 61,188

Our mobile communications service sales include sales earned from product repairs, sales of satellite telephone and Internet usage services, and certain DIRECTV and DISH Network account referral fees earned in conjunction with the sale of our products. We provide, for a fee, third-party satellite telephone and Internet airtime to our TracPhone and Internet customers who choose to activate their subscriptions with us. We also earn service sales from broadband Internet and VOIP service sold with our mini-VSAT product. Under current DIRECTV and DISH Network programs, we are eligible to receive a one-time subsidy for each receiver activated and a new mobile account activation fee from DIRECTV and DISH Network for each customer who activates their DIRECTV or DISH Network service directly through us. Our guidance and stabilization service sales include 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 9 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 September 30, 2009. 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.

Results of Operations

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





                                      Three months ended         Nine months ended
                                        September 30,              September 30,
                                     2009           2008         2009          2008
     Sales:
     Product                           82.2 %         78.3 %       83.3 %       86.2 %
     Service                           17.8           21.7         16.7         13.8

     Net sales                        100.0          100.0        100.0        100.0


     Costs and expenses:
     Costs of product sales            47.1           48.9         52.8         51.9
     Costs of service sales            13.5           10.0         11.8          6.4
     Sales, marketing and support      18.7           22.7         19.7         19.3

                                        Three months ended          Nine months ended
                                          September 30,               September 30,
                                       2009           2008          2009           2008
  Research and development              10.1            11.5          10.0          9.5
  General and administrative             8.6            12.6           9.1          8.6

  Total costs and expenses              98.0           105.7         103.4         95.7

  Income (loss) from operations          2.0            (5.7 )        (3.4 )        4.3
  Interest income                        0.3             1.8           0.4          1.7
  Interest expense                       0.1             0.2           0.1          0.2
  Other expense, net                     0.1             0.3           0.0          0.4

  Income (loss) before income taxes      2.1            (4.4 )        (3.1 )        5.4
  Income tax expense                     0.4             0.7           0.0          0.9

  Net income (loss)                      1.7 %          (5.1 )%       (3.1 )%       4.5 %

Three Months Ended September 30, 2009 and 2008

Net Sales

Product sales for the three months ended September 30, 2009 increased $6.3 million, or 51%, to $18.6 million from $12.3 million for the three months ended September 30, 2008. The primary reason for the increase was a $7.3 million, or 264%, increase in sales of our guidance and stabilization products. Specifically, sales of our FOG products increased $7.0 million, or 767%, driven largely by increased sales in support of remotely operated weapons station programs. However, although our expectation is that FOG product sales will continue to increase in support of remotely operated weapons station programs in 2010, we do not expect such a level of growth rate to continue. Also contributing to the increase was a $0.4 million increase in sales related to our TACNAV defense products. Partially offsetting the increase was a decrease in sales of our marine products of $0.7 million, or 9%, compared with the three months ended September 30, 2008. This decrease was principally the result of decreases in the sales of our marine consumer products, including the TracVision M-series satellite television products and Inmarsat-compatible TracPhone products. In addition, sales of our land mobile products decreased by $0.3 million, or 16%, compared to the three months ended September 30, 2008. Mobile communications product sales originating from our Danish subsidiary decreased $0.2 million, or 8%, from the three months ended September 30, 2008 to the three months ended September 30, 2009. Mobile communications product sales originating from North America decreased $0.7 million, or 11%, from the three months ended September 30, 2008 to the three months ended September 30, 2009.

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 2008 and in the first, second and third quarter of 2009, caused declines in demand for our land mobile products and our marine consumer products.

Our operating performance depends significantly on general economic conditions, which have worsened dramatically in recent periods. Net sales of our mobile communications products are largely generated by discretionary consumer spending, and demand for these products is likely to demonstrate slower growth or decline as a result of weak regional and global economic conditions. Consumer spending tends to decline during recessionary periods and may decline at other times. Consumers may choose not to purchase our mobile communications products due to a perception that they are luxury items. As global and regional economic conditions change, including the general level of interest rates, fluctuating oil prices and demand for durable consumer products, demand for our products could be materially and adversely affected. As a result of these and other factors, customers could slow or suspend spending on our products and services. We may also be forced to further increase our allowance for doubtful accounts, which would have a negative impact on our earnings and financial condition. During the first nine months of 2009, we recorded an additional $0.6 million to our allowance for doubtful accounts. The increase was largely driven by the increase in revenue of our airtime services business and the financial deterioration of a few of our mobile communication product distributors. We cannot predict the timing, duration or ultimate impact of the current economic downturn. We expect our business to continue to be adversely impacted by this downturn.

Governments are experiencing significant declines in tax receipts, which may cause them to curtail spending significantly or reallocate funds away from defense programs. There can be no assurances that government responses to the disruptions in the economy will remedy these problems.

Service sales for the three months ended September 30, 2009 increased $0.6 million, or 18%, to $4.0 million from $3.4 million for the three months ended September 30, 2008. The primary reason for the increase was a $1.0 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 of $0.4 million.

Cost of Sales

For the three months ended September 30, 2009, costs of product sales increased by $3.0 million, or 39%, to $10.7 million for the three month ended September 30, 2009 from $7.7 million for the three months ended September 30, 2008. The primary reason for the increase in dollar amount was the increase in unit sales of higher priced FOG products, partially offset by a decline in unit sales of mobile communications products and a shift in the sales mix of mobile communications products toward lower priced marine products.

Costs of service sales increased by $1.5 million, or 94%, to $3.0 million for the three month ended September 30, 2009 from $1.6 million for the three months ended September 30, 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 the fourth quarter of 2009 and at least during the first half of 2010 as we complete the initial build out of the global mini-VSAT infrastructure.

Gross margin from product sales for the three months ended September 30, 2009 increased to 43% from 38% in the year-ago period. The primary reason for the increase in gross margin was a 264% increase in our relatively higher margin guidance and stabilization product sales resulting in improved utilization of production capacity for fiber optic gyros for the three-month period ended September 30, 2009. Also contributing to the gross margin improvement was a 10% decrease in our relatively lower margin mobile communication product sales.

Gross margin from service sales for the three months ended September 30, 2009 decreased to 24% from 54% in the year-ago period, primarily 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.

Operating Expenses

Sales, marketing and support expense for the three months ended September 30, 2009 increased by $0.7 million, or 19%, to $4.2 million from $3.6 million for the three months ended September 30, 2008. The primary reason for the increase in 2009 was a $0.4 million increase in commission expense as a result of the increased product and airtime sales discussed above. Also contributing to the increase was a $0.2 million increase in employee compensation for sales, marketing and support, primarily as a result of an increase in stock compensation expense and accrued performance based incentive compensation, and a $0.1 million increase in bad debt expense. As a percentage of sales, sales, marketing and support expense decreased during the quarter ended September 30, 2009 to 19% from 23% for the quarter ended September 30, 2008, due primarily to the increase in overall product and service sales discussed above.

Research and development expense for the three months ended September 30, 2009 increased by $0.5 million, or 26%, to $2.3 million from $1.8 million for the three months ended September 30, 2008. The primary reason for the increase in 2009 expense was the core completion of the development project for the DIRECTV-compatible satellite television antenna to be used on narrowbody commercial aircraft. The project was substantially complete in the second quarter of 2009 and resulted in a $0.9 million decrease in the capitalization of aviation antenna development costs (see note 13 to the condensed consolidated financial statements) during the third quarter of 2009 versus the third quarter of 2008 and a corresponding increase in research and development expense. Partially offsetting this increase was a decrease in engineering related employee compensation and material costs. As a percentage of sales, research and development expense decreased during the quarter ended September 30, 2009 to 10% from 12% for the quarter ended September 30, 2008, due primarily to the increase in overall product and service sales discussed above.

General and administrative expense for the three months ended September 30, 2009 was $1.9 million, which was generally consistent with the general and administrative expense for the three months ended September 30, 2008. As a percentage of sales, general and administrative expense decreased during the quarter ended September 30, 2009 to 9% from 13% for the quarter ended September 30, 2008, due primarily to the increase in overall product and service sales discussed above.

Interest Income and Other Expense

Interest income and other expense for the three months ended September 30, 2009 decreased by $0.2 million to $0.0 million from $0.2 million for the three months ended September 30, 2008. The primary reason for the decrease was a $0.2 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 September 30, 2009.

Income Tax Expense

Income tax expense for the three months ended September 30, 2009 was $0.1 million, which was consistent with income tax expense for the three months ended September 30, 2008. Our effective tax rate was 19.6% for the three months ended September 30, 2009

compared to 15.7% for the year-ago period. 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. The consistency in income tax expense in 2009 is attributed to the similar level of taxable income generated by our Danish subsidiary for the three months ended September 30, 2009 from the three months ended September 30, 2008.

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 September 30, 2009, the maximum amount of reduction which could impact income tax expense totaled approximately $5.3 million). In addition, as a portion of our deferred tax assets were generated from excess tax deductions from share-based payment awards, pursuant to ASC 718, Compensation-Stock Compensation, a portion of any such valuation allowance reversal would be recorded to additional paid-in capital when the deduction reduces tax payable (as of September 30, 2009, such amount would total approximately $1.9 million).

Nine Months Ended September 30, 2009 and 2008

Net Sales

Product sales for the nine months ended September 30, 2009 decreased $0.4 million, or 1%, to $52.3 million from $52.7 million for the nine months ended September 30, 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 2008 and the first, second and third quarters of 2009, caused declines in demand for our land mobile products and our marine consumer products. Sales of our marine products decreased by $10.7 million, or 32%, compared with the nine months ended September 30, 2008. This decrease was principally the result of decreases in the sales of our marine consumer products, including the TracVision M-series satellite television products and Inmarsat-compatible TracPhone products. In addition, sales of our land mobile products decreased by $5.3 million, or 60%, compared to the nine months ended September 30, 2008. Mobile communications product sales originating from our Danish subsidiary decreased $5.2 million, or 36%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009. Mobile communications product sales originating from North America decreased $10.7 million, or 38%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009.

Sales of our guidance and stabilization products increased by $15.5 million, or 152%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009. Specifically, sales of our FOG products increased $15.2 million, or 323%, driven largely by increased sales in support of remotely operated weapons station programs.

Service sales for the nine months ended September 30, 2009 increased $2.0 million, or 24%, to $10.5 million from $8.5 million for the nine months ended September 30, 2008. The primary reason for the increase was a $3.4 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 and extended warranty sales of $1.1 million.

Cost of Sales

For the nine months ended September 30, 2009, costs of product sales increased by $1.4 million, or 4%, to $33.1 million for the nine months ended September 30, 2009 from $31.8 million for the nine months ended September 30, 2008. The primary reason for the increase was the increase in unit sales of higher priced FOG products, which was partially offset by a decline in unit sales of mobile communication products and a shift in the sales mix of mobile communications products towards lower priced marine products.

Costs of service sales increased by $3.5 million, or 91%, to $7.4 million for the nine months ended September 30, 2009 from $3.9 million for the nine months ended September 30, 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.

Gross margin from product sales for the nine months ended September 30, 2009 decreased to 37% from 40% in the year-ago period. The deterioration in our gross margin from product sales was attributable to under-utilization of our production capacity earlier in 2009 due to reduced unit sales of mobile communications products, a higher level of price discounts to maintain our competitive position in the mobile communications marketplace and a $1.1 million increase in our inventory reserves primarily related to certain military components and the introduction of new mobile communication products.

Gross margin from service sales for the nine months ended September 30, 2009 decreased to 29% from 54% 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.

Operating Expenses

Sales, marketing and support expense for the nine months ended September 30, 2009 increased by $0.5 million, or 5%, to $12.4 million from $11.8 million for the nine months ended September 30, 2008. As a percentage of sales, year-to-date sales, marketing and support expense increased to 20% in 2009 from 19% in 2008. The primary reason for the increase in 2009 was a $0.6 million increase in commission expense as a result of the increase in selected product sales and airtime sales discussed above. Also contributing to the increase was a $0.5 million increase in bad debt expense. Partially offsetting the increase was a $0.5 million decrease in warranty and service-related expenses.

Research and development expense for the nine months ended September 30, 2009 increased by $0.5 million, or 8%, to $6.3 million from $5.8 million for the nine months ended September 30, 2008. The primary reason for the increase in 2009 expense was the core completion of the development project for the DIRECTV-compatible satellite television antenna to be used on narrowbody commercial aircraft. The project was substantially complete in the second quarter of 2009 and resulted in a $1.2 million decrease in the capitalization of aviation antenna development costs (see note 13 to the condensed consolidated financial statements) during the nine months end September 30, 2009 versus the nine months ended September 30, 2008 and a corresponding increase in research and development expense. Partially offsetting this increase was a decrease in engineering related employee compensation and material costs. As a percentage of sales, year-to-date research and development expense remained fairly consistent on a year-over-year basis at 10%. . . .