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, potential delays in the release of purchase orders for our products pursuant to outstanding contracts, consequences of inventory buildups in anticipation of purchase orders that may not be fulfilled, addressing the process of U.S. military procurement, the successful commercialization of our products, the successful integration of our acquired businesses, potential restrictions on our ability to access our line of credit, 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 and Part II, Item 1A, "Risk Factors" in this Form 10-Q.
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.
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. (See Note 12 in the Notes to Condensed Consolidated Financial Statements for additional information.)

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 annual post-acquisition financial milestones, we will issue up to an aggregate of 200,000 unregistered shares of our common stock, during the period ending December 31, 2012. (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.) On June 1, 2009, the Board of Directors appointed John C. Casper as our Vice-President of Finance and Chief Financial Officer, succeeding Robert W. Fishback.
Overview
We reported revenue of $42,400 for the third quarter of 2009 and an operating loss of $400 with an adjusted EBITDA of $1,400. Third quarter revenue was up slightly from the second quarter of 2009.
Subsequent to the end of the third quarter, an Indefinite Delivery/Indefinite Quantity ("IDIQ") contract for our SATCOM-on-the-Move ("SOTM") systems was finally concluded between our Prime Contractor customer and the U.S. Department of Defense. With an IDIQ contract now in place, our customer placed a $20,000 order for our SOTM systems, which we announced in late October 2009. We also learned that the delay in finalizing the MRAP All Terrain Vehicle ("MATV") contract caused the government to source a different system for the MATV program, at least for the current demand under the program, despite the fact that ours was the specified system, and even though our cables were being pre-installed in the vehicles. This outcome was a disappointment for us. Although we exhausted numerous channels in challenging this decision, our status as a subcontractor limits our remedies.

The government's decision to source a different system in the MATV program does not alter our standing as one of the two government-approved suppliers of SOTM systems. Advanced communications systems remain an important part of our government and military product portfolio and a tremendous opportunity. We expect to see continued requirements for these types of systems for new vehicle programs and for existing fleet inventory. In geographies such as Afghanistan and Pakistan, line of sight communications can be extremely limited. We anticipate that virtually every vehicle, and especially those going into remote areas, will need SATCOM capability. Based on our understanding and belief, our tactical repeater is being used to extend the range of handheld radios by U.K. Special Operations units operating in Afghanistan to great effect. We are also responding to a greater number of inquiries for our communications products from foreign government/defense organizations for both our SATCOM systems and tactical repeater systems. The deployment of these range extension systems has not gone unnoticed by our government's international allies, and it is a capability that we are starting to aggressively market internationally. During the third quarter of 2009, we decreased inventories by more than $8,000. We expect another major reduction in the fourth quarter of 2009 as we start to make long awaited shipments of SOTM systems on our recently announced order. Sales of batteries remained strong during the third quarter of 2009 with rechargeable sales down slightly due to shipment timing issues. During the fourth quarter of 2009, we expect to start shipping on the $12,000 order for chargers and one particular battery to the U.K. military under our new contract with General Dynamics United Kingdom Limited. Three other battery types are included on the contract, all for use with the U.K. Ministry of Defence's primary communications radio system. Over the next year we will be qualifying those batteries so that we can accept orders for them as well.
Communications systems sales increased during the third quarter of 2009, mostly due to the direct sale of some SOTM systems to the U.S. Military. Our recently acquired AMTI amplifier unit had a very strong quarter, and we are starting to use the AMTI amplifiers in our systems including the latest version of our tactical repeater. Our compact amplifier gives us a highly advantaged product in the fast growing handheld radio market as well as an advantage in designing compact and portable advanced communications systems.
We also saw a sequential increase in sales in our standby power unit during the third quarter of 2009. While very competitive equipment pricing is adversely impacting margins on our products and services, a better mix of service revenue improved overall margins in the third quarter of 2009. As adjustments in inventory levels and competitive shakeouts improve pricing, we expect a continued gradual improvement in margins.
In commercial markets, we have focused our product development efforts on our smart lithium ion rechargeable batteries for backup power and energy storage. We have developed and have begun customer testing of lithium ion batteries for rack mounted communications or computing systems and for distributed communications hubs. These batteries are up to 10Kw in size and can discharge up to as high as 120 amps. We are also in development of larger energy storage and backup battery systems in the 100Kw to 2Mw range for use in supporting renewable energy and smart grid projects. This is an area where our smart circuit technology, our manufacturing capability and our installation and service resources can change the way backup and energy storage systems are deployed and managed, and can start to address the energy storage needs of renewable energy systems.

Results of Operations
Three-month periods ended September 27, 2009 and September 27, 2008 Revenues. Consolidated revenues for the three-month period ended September 27, 2009 amounted to $42,363, a decrease of $25,630, or 37.7%, from the $67,993 reported in the same quarter in the prior year.
Non-Rechargeable product sales increased $2,617, or 16.6%, from $15,741 last year to $18,358 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 $464, or 5.8%, from $8,020 last year to $8,484 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 $31,110, or 76.5%, from $40,675 last year to $9,565 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 $2,399, or 67.4%, from $3,557 last year to $5,956 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 $31,999 for the quarter ended September 27, 2009, a decrease of $20,308, or 38.8%, from the $52,307 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 76.9% for the three-month period ended September 27, 2008 to 75.5% for the three-month period ended September 27, 2009. Correspondingly, consolidated gross margin was 24.5% for the three-month period ended September 27, 2009, compared with 23.1% for the three-month period ended September 27, 2008, generally attributable to the margin improvements in all of the operating segments. The margin results in the Communications Systems segment were positively impacted due to the recognition of a gain on litigation settlement totaling $1,256, in relation to the settlement of an ongoing litigation with a vendor, which partially offset the significant reduction in sales of our higher margin Communications Systems products.
In our Non-Rechargeable Products segment, the cost of products sold increased $1,166, from $13,835 in the three-month period ended September 27, 2008 to $15,001 in 2009. Non-Rechargeable gross margin for 2009 was $3,357, or 18.3% of revenues, an increase of $1,451 from 2008's gross margin of $1,906, or 12.1% of revenues. Non-Rechargeable gross margin and gross margin as a percentage of revenues both increased for the three-month period ended September 27, 2009, primarily as a result of higher sales volumes and product mix, in comparison to the three-month period ended September 27, 2008. In addition, ongoing transition costs related to our second quarter of 2008 restructuring initiative at our UK operation, factored into our margin results for 2008.
In our Rechargeable Products segment, the cost of products sold increased $201, from $6,282 in the three-month period ended September 27, 2008 to $6,483 in 2009. Rechargeable gross margin for 2009 was $2,001, or 23.6% of revenues, an increase of $263 from 2008's gross margin of $1,738, or 21.7% 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 $23,484, from $29,304 in the three-month period ended September 27, 2008 to $5,820 in 2009. Communications Systems gross margin for 2009 was $3,745, or 39.2% of revenues, a decrease of $7,626 from 2008's gross margin of $11,371, or 28.0% of revenues. The increase in the gross margin percentage for Communications Systems resulted from the recognition of a gain on litigation settlement totaling $1,256, in relation to the settlement of an ongoing litigation with a vendor, which was partially offset by the overall sales mix and lower sales volume in this segment. We had also implemented a four-day work week for production personnel in our Newark operations, which included a significant portion of our communications systems manufacturing operations, in the third quarter of 2009, to align inventory and production levels with current sales levels. For the fourth quarter of 2009, we have resumed a full five-day work week for production personnel in our Newark operations in response to increased production demand.
In our Design and Installation Services segment, the cost of sales increased $1,809, from $2,886 in the three-month period ended September 27, 2008 to $4,695 in 2009. Design and Installation Services gross margin for 2009 was $1,261, or 21.2% of revenues, an increase of $590 from 2008's gross margin of $671, or 18.9% of revenues. Gross margin in this particular segment improved due to the overall increase in higher margin service revenue. The improvement was partially offset by the continued short-term price competition with component suppliers and ongoing integration efforts related to the USE acquisition.
Operating Expenses. Total operating expenses for the three-month period ended September 27, 2009 totaled $10,768, an increase of $380 from the prior year's amount of $10,388. Overall, operating expenses as a percentage of sales increased to 25.4% in the third quarter of 2009 from 15.3% reported in the prior year, due to the overall expense increase over a lower revenue base. In response to this unfavorable change to the percentage of sales, we have consolidated some of our operations in an effort to lower the fixed costs basis of our operations, performed an overall cost reduction analysis and tightened our cost controls, and deferred some of our discretionary spending. Amortization expense associated with intangible assets related to our acquisitions was $449 for 2009 ($310 in selling, general and administrative expenses and $139 in research and development costs), compared with $517 for 2008 ($362 in selling, general, and administrative expenses and $155 in research and development costs). Research and development costs were $2,748 in 2009, an increase of $587, or 27.2%, over the $2,161 reported in 2008 as we increased our investment in product development and design activity. Selling, general, and administrative expenses decreased $207, or 2.5%, to $8,020. This decrease was comprised of the consolidation of some of our operations, tightened overall cost controls and the deferral of some discretionary spending.
Other Income (Expense). Other income (expense) totaled ($104) for the third quarter of 2009, compared to ($418) for the third quarter of 2008. Interest expense, net of interest income, increased $211, to $454 for the third quarter of 2009 from $243 for the comparable period in 2008, mainly as a result of higher average borrowings under our revolving credit facility. Miscellaneous income/expense amounted to income of $350 for the third quarter of 2009 compared with expense of $175 for the same period in 2008. The income in 2009 and expense in 2008 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 $105 for the third quarter of 2009 compared with $213 in the third quarter of 2008. The effective tax rate for the total consolidated company for the three-month periods ended September 27, 2009 and 2008 was:

                                                   Three-Month Periods Ended
                                                         September 27,
                                                   2009               2008
       Income (Loss) before Incomes Taxes (a)   $      (508 )     $       4,880

       Total Income Tax Provision (b)           $       105       $         213

       Effective Tax Rate (b/a)                        20.7 %               4.4 %

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 September 27, 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 September 27, 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 third quarter of 2009. However, this limitation did have an impact of $151 on income taxes determined for the third 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 $605 and $0.04, respectively, for the three months ended September 27, 2009, compared to a net income attributable to Ultralife and earnings attributable to Ultralife common shareholders per diluted share of $4,657 and $0.26, 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 17,722,000 in the third quarter of 2008 to 16,921,000 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.
Nine-month periods ended September 27, 2009 and September 27, 2008 Revenues. Consolidated revenues for the nine-month period ended September 27, 2009 amounted to $121,759, a decrease of $83,719, or 40.7%, from the $205,478 reported in the prior year.
Non-Rechargeable product sales increased $4,799, or 10.0%, from $48,056 last year to $52,855 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 $13,397, or 69.6%, from $19,248 last year to $32,645 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 $106,273, or 83.9%, from $126,675 last year to $20,402 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 $4,358, or 37.9%, from $11,499 last year to $15,857 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 $96,834 for the nine-month period ended September 27, 2009, a decrease of $61,455, or 38.8%, from the $158,289 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 77.0% for the nine-month period ended September 27, 2008 to 79.5% for the nine-month period ended September 27, 2009. Correspondingly, consolidated gross margin was 20.5% for the nine-month period ended September 27, 2009, compared with 23.0% for the nine-month period ended September 27, 2008, generally attributable to the margin decreases in the Design and Installation Services segments, offset by improvements in the Non-Rechargeable Products, Rechargeable Products and Communications Systems segments. The margin results in the Communications Systems segment were positively impacted due to the recognition of a gain on litigation settlement totaling $1,256, in relation to the settlement of an ongoing litigation with a vendor, which partially offset the significant reduction in sales of our higher margin Communications Systems products. In our Non-Rechargeable Products segment, the cost of products sold increased $2,476, from $40,843 in the nine-month period ended September 27, 2008 to $43,319 in 2009. Non-Rechargeable gross margin for 2009 was $9,536, or 18.0% of revenues, an increase of $2,323 from 2008's gross margin of $7,213, or 15.0% of revenues. Non-Rechargeable gross margin and gross margin as a percentage of revenues both increased for the nine-month period ended September 27, 2009, primarily as a result of higher sales volumes and product mix, in comparison to the nine-month period ended September 27, 2008. Also, the approximate $750 restructuring charge that was recorded relating to refocusing our U.K. operations toward enhancing our ability to serve our customers, including the U.K. Ministry of Defence, resulting in employee termination costs and certain asset valuation adjustments in 2008, did not reoccur in 2009. In our Rechargeable Products segment, the cost of products sold increased $9,731, from $15,488 in the nine-month period ended September 27, 2008 to $25,219 in 2009. Rechargeable gross margin for 2009 was $7,426, or 22.7% of revenues, an increase of $3,666 from 2008's gross margin of $3,760, or 19.5% 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 . . .