• 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 for the three months and nine months ended October 3, 2009:
• We completed the acquisitions of Formation and Satamatics on January 9, 2009 and February 13, 2009, respectively. In the third quarter and first nine months of 2009, these newly acquired product lines along with Sky Connect, LLC ("Sky Connect"), which was acquired in August of 2008, generated $15.6 million and $51.9 million of net sales, and incurred losses of $1.8 million and $1.2 million before income taxes, respectively. The results include amortization of intangible assets of $1.8 million and $6.1 million for the three months and nine months ended October 3, 2009. In addition, lower-than-expected net sales were generated from these businesses in the third quarter of 2009, reflecting a delay in shipments due to changes in scheduled deliveries requested by a customer. Shipments for these products are expected to resume in the fourth quarter of 2009.

• Consolidated net sales were lower by 2.4% in the third quarter of 2009, and grew by 12.4% in the first nine months of 2009 as compared with same periods in 2008, respectively. Growth in net sales at Communications & Tracking (principally reflecting the newly acquired product lines) and D&S was offset in the third quarter of 2009, and partially offset in the first nine months of 2009, by lower net sales at LXE (reflecting the challenging global economic climate). Net sales from Communications & Tracking's organic product line were down for the third quarter and first nine months of 2009, as compared with the same periods of 2008, due to lower net sales from aeronautical products and from the Inmarsat development project that was not included in the 2009 results.

• Our earnings from continuing operations of $6.2 million for the nine months ended October 3, 2009 included $5.3 million of acquisition-related charges that are required to be reported as a current expense per the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141(R), Business Combinations (which is now included in Financial Accounting Standards Board ("FASB") Accounting Standards CodificationTM ("ASC") Topic 805, Business Combinations), $6.1 million of amortization of intangible assets related to our new acquisitions, and approximately $2.8 million of severance costs, but also included a tax benefit of $1.9 million for prior-year research and development credits, and an additional tax benefit of $1.8 million related to changes in estimated earnings projected for 2009. Our earnings from continuing operations of $6.0 million for the three months ended October 3, 2009 included $1.8 million of amortization of intangible assets related to our new acquisitions, and approximately $0.5 million of severance costs, but also included tax benefits of $3.9 million.

• Our markets are seeing the unfavorable impact of the economy and they are 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 through 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 it is reasonably possible that we may be required to recognize an impairment loss related to goodwill or other long-lived 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 (which is now included in ASC Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements), or American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition (which is now included in ASC Subtopic 985-605, 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-of-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 is also affected by changes in foreign currency exchange rates, mainly because the 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. 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 items
Acquisition-related items include the costs of engaging outside professionals for legal, due diligence, business valuation, and integration services related to business combinations. The category also includes adjustments related to 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 have assets and liabilities that are denominated in a currency different than 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 effects on trade payables and foreign exchange gains and losses result.

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.
Discontinued operations
In 2005 and 2006, the Company disposed of S&T/Montreal, SatNet, and EMS Wireless, which were reported as discontinued operations through their dates of disposition in the Company's consolidated financial statements. The expenses reported under discontinued operations are costs that relate directly to the resolution of various contingencies, representations or warranties as specified under the standard indemnification provisions of the sales agreements. Results of Operations
The following table sets forth the percentage relationship of each line item to net sales for each period.

                                             Three Months Ended                  Nine Months Ended
                                       October 3        September 27       October 3       September 27
                                          2009              2008              2009             2008

Product net sales                            76.7 %              81.4            76.5               82.2
Service net sales                            23.3                18.6            23.5               17.8

Net sales                                   100.0               100.0           100.0              100.0
Product cost of sales as a
percentage of product net sales              70.4                63.5            66.2               63.4
Service cost of sales as a
percentage of service net sales              53.8                62.2            69.9               61.1
Cost of sales                                66.5                63.3            67.0               63.0
Selling, general and administrative
expenses                                     24.6                22.7            24.5               24.9
Research and development expenses             6.2                 5.8             5.1                6.4
Acquisition-related charges                  (0.3 )                 -             1.9                  -

Operating income                              3.0                 8.2             1.5                5.7
Interest income                               0.0                 0.7             0.1                1.0
Interest expense                             (0.6 )              (0.5 )          (0.7 )             (0.5 )
Foreign exchange loss, net                   (0.2 )              (0.5 )          (0.2 )             (0.1 )

Earnings from continuing operations
before income taxes                           2.2                 7.9             0.7                6.1
Income tax benefit (expense)                  4.8                (1.0 )           1.6               (0.5 )

Net earnings from continuing
operations                                    7.0                 6.9             2.3                5.6

Discontinued operations:
Loss from discontinued operations
before income taxes                          (1.3 )                 -            (0.4 )                -
Income tax benefit                            0.5                   -             0.1                  -

Loss from discontinued operations            (0.8 )                 -            (0.3 )                -

Net earnings                                  6.2 %               6.9             2.0                5.6

Three Months ended October 3, 2009 and September 27, 2008:
Net sales decreased by 2.4% to $85.7 million from $87.8 million for the third quarter of 2009 as compared with the same period in 2008, reflecting the effects of the economic slow-down on our businesses. The growth in net sales by two of our three operating segments, Communications & Tracking and D&S, was completely offset by the reduction in net sales at LXE. LXE's net sales for the third quarter of 2009 were $11.5 million lower than the same period in 2008, with lower net sales in both the Americas and International markets. Net sales increased at Communications & Tracking by 17.0% from the contribution of our recently acquired product lines. Such increases were partially offset by a decline in net sales from Communications & Tracking's organic product line in the third quarter of 2009, as compared with the same period in 2008. D&S net sales were higher by 21.7% mainly due to increased activity on military programs.
Product net sales decreased by 8.0% to $65.8 million in the third quarter of 2009 as compared with the third quarter in 2008. This decrease was primarily due to a $11.2 million reduction in net sales by LXE, which offset the growth in product net sales generated by D&S from the increased activity on military projects, and by Communications & Tracking from our recently acquired product lines. Service net sales increased by 22.2% to $20.0 million in the third quarter of 2009 as compared with the same period in 2008, mainly due to the service revenue generated from our newly acquired product lines. As a result, service net sales comprised a higher percentage of total net sales in the third quarter of 2009 as compared with the third quarter of 2008.
Overall cost of sales as a percentage of consolidated net sales was higher in the third quarter of 2009 as compared with the same period in 2008 due to higher cost-of-sales percentages reported by each of our three reportable operating segments. Product cost of sales, as a percentage of its respective net sales, was higher in the third 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 higher percentage of net sales generated by our D&S segment, which had a higher cost-of-sales percentage than our other two operating segments, and the acquisition of the new product lines in 2009 in Communications & Tracking, which had a higher cost-of-sales percentage than our existing SATCOM business, primarily due to the amortization of intangible assets. Service cost of sales, as a percentage of its respective net sales, was lower in the third quarter of 2009 as compared with the same period in 2008 mainly due to an increase in service revenue generated from our newly acquired product lines which had a lower cost-of-sales percentage than our other two operating segments.
SG&A expenses as a percentage of consolidated net sales increased for the third quarter of 2009 as compared with the third quarter of 2008 due to the lower volume of net sales. Actual expenses were higher by $1.1 million in the third quarter of 2009 as compared with the same period of 2008 mainly due to the additional costs related to the recently acquired product lines at Communications & Tracking, including additional amortization of intangible assets. These additional costs were partially offset by the impact of management's continued cost-reduction efforts, and the favorable effect of changes in foreign currency exchange rates on our LXE and SATCOM international operations.
R&D expenses increased by $0.2 million in the third quarter of 2009, mainly due to additional R&D expenses related to our recently acquired product lines. This increase in expenses was partially offset by 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.
Acquisition-related items included a net credit of $0.2 million in the third quarter of 2009 related to the contingent consideration liability to reflect changes in the expected probability of paying the projected amounts, net of accretion of the discounted liability. See Note 2 to the consolidated financial statements in this Quarterly Report for additional information on business acquisitions.
Interest income decreased by $0.6 million in the third quarter of 2009, mainly as a result of the decrease in average investment balances and, to a lesser extent, lower average interest rates earned on our investment balances. The third quarter of 2009 included a $0.2 million foreign exchange net loss related to the conversion of assets and liabilities not denominated in the functional currency and to changes in the fair value of forward contracts used to hedge against currency exposure.

We recognized an income tax benefit of $4.1 million in the third quarter of 2009. During the quarter we recognized a change in estimate of $1.9 million for prior-year R&D credits in the U.S. after completion of an Internal Revenue Service examination. Further, a benefit of $2.2 million was recognized related to the year-to-date losses before income taxes in certain jurisdictions in which losses have been projected for the full year. In our other jurisdictions we project no tax expense for 2009 based upon management's expectations for taxable income and tax credits for the full year. The 2008 third-quarter expense of $0.9 million was based on management's projection of the effective rate for the full year partially offset by a benefit of $0.2 million 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. 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.
Nine Months ended October 3, 2009 and September 27, 2008:
Net sales increased by 12.4% to $274.9 million from $244.6 million for the first nine months of 2009 as compared with the same period in 2008, reflecting growth in net sales from two of the Company's three reportable operating segments, Communications & Tracking and D&S, with increases of 46.6% and 40.9%, respectively. The increase in net sales by Communications & Tracking was generated from our recently acquired product lines. Such increases were partially offset by a decline in net sales from Communications & Tracking's organic product line in the first nine months of 2009, as compared with the same period in 2008. D&S's net sales were higher mainly due to significant work performed on a military communications research project and increased activity on military programs due to the expansion of its workforce to meet order demands. LXE's net sales for the first nine months of 2009 were $29.5 million less than the same period in 2008, with lower net sales in both the Americas and International markets.
Product net sales increased by 4.6% to $210.5 million in the first nine months of 2009 as compared with the first nine months of 2008. This was primarily due to the product net sales generated from our recently acquired product lines, partially offset by lower net sales by LXE and the organic product lines of Communications & Tracking. Service net sales increased by 48.3% to $64.5 million in the first nine months of 2009 as compared with the same period in 2008, mainly due to significant work performed on a military communications research project by D&S, and the service revenue generated from our newly acquired product lines at Communications & Tracking. As a result, service net sales comprised a higher percentage of total net sales in the first nine months of 2009 as compared with the first nine months of 2008.
Overall cost of sales as a percentage of consolidated net sales was higher in the first nine 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 nine months of 2009 as compared with the same period in 2008. The increase in product cost of sales, as a percentage of its respective net sales, was mainly due to the acquisition of the new product lines in 2009 which had a higher cost-of-sales percentages than our existing SATCOM business, primarily due to the amortization of intangible assets, and a higher percentage of net sales generated by our D&S segment, which had a higher cost-of-sales percentage than our other two operating segments. Product cost of sales was also increased due to a lower production volume by our LXE segment over which fixed costs were absorbed, and an unfavorable effect of changes in foreign currency exchange rates. The increase in the 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 $1.1 million of additional severance costs recorded in the first nine 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 nine months of 2009 as compared with the first nine months in 2008. Actual expenses grew by $6.5 million in the first nine months of 2009 as compared with the same periods in 2008 mainly due to the additional costs related to the acquired product lines, including additional amortization of intangible assets. These additional costs were partially offset by the impact of management's . . .